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Although wildland fires triggered by lightning are a natural, inevitable, and in many cases a necessary ecological process, past federal fire suppression policies have led to an accumulation of fuels and contributed to larger and more severe wildland fires. In recent years, both the number of acres burned by wildland fires and the costs to suppress fires have been increasing. From 1995 through 1999, wildland fires burned an average of 4.1 million acres each year; from 2000 through 2004, the fires burned an average of 6.1 million acres each year--an increase of almost 50 percent. During the same periods, the costs incurred by federal firefighting entities to suppress wildland fires more than doubled, from an average of $500 million annually to about $1.3 billion annually. Although efforts to fight these larger, more severe fires have accounted for much of the increase in suppression costs, the continuing development of homes and communities in areas at risk from wildland fires and the efforts to protect these structures also contribute to the increasing costs. Forest Service and university researchers estimate that about 44 million homes in the lower 48 states are located in the wildland-urban interface. When fire threatens the wildland-urban interface, firefighting entities often need to use substantial resources--including firefighters, fire engines, and aircraft to drop retardant--to fight the fire and protect homes. As wildland fire suppression costs have continued to rise, increasing attention has focused on how suppression costs for multijurisdictional fires are shared. To share suppression costs for a specific fire, local representatives of federal and nonfederal firefighting entities responsible for protecting lands and resources affected by the fire--guided by the terms of the master agreement--decide which costs will be shared and for what period. They document their decisions in a cost-sharing agreement for that fire. According to federal officials, cooperating entities traditionally shared suppression costs on the basis of the proportion of acres burned in each entity's protection area because the method was relatively easy to apply and works well when the lands affected by a wildland fire are similar. Officials said that the use of alternative cost- sharing methods has been increasing in recent years. Federal and nonfederal entities included in our review used a variety of methods to share the costs of fighting fires that burned or threatened both federal and nonfederal lands and resources. Although master agreements between federal and nonfederal entities typically listed several cost- sharing methods, the agreements often lacked clear guidance for officials to follow in deciding which cost-sharing method to apply to a specific fire. Consequently, for eight fires we reviewed in four states, we found varied cost-sharing methods used and an inconsistent application of these methods within and among states, although the fires had similar characteristics. The type of cost-sharing method chosen is important because it can have significant financial consequences for the federal and nonfederal entities involved. Master agreements provide the framework for federal and nonfederal entities to work together and share the costs of fighting wildland fires. The master agreements we reviewed for 12 western states all directed federal and nonfederal entities to develop a separate agreement, documenting how costs were to be shared for each fire that burned--or, in some cases, threatened to burn--across multiple jurisdictions. The master agreements varied in the cost-sharing methods specified: The master agreement for 1 state (Idaho) did not identify any specific cost- sharing method to use. The master agreements for 3 states (Alaska, Arizona, New Mexico) listed the acres-burned method as the primary or only method to be used. Although two of these agreements allowed the use of alternative cost- sharing methods, they did not explicitly state under what circumstances an alternative method would be appropriate. The master agreements for 8 remaining states listed multiple, alternative cost-sharing methods but did not provide clear guidance on when each method should be used. Federal and nonfederal entities used varied cost-sharing methods for the eight fires we reviewed, although the fires had similar characteristics. As shown in figure 1, the cost-sharing methods used sometimes varied within a state or from state to state. The costs for the two fires that we reviewed in Utah were shared using two different methods, although both fires had similar characteristics. For the Blue Springs Fire, federal and nonfederal officials agreed that aircraft and engine costs of protecting an area in the wildland-urban interface during a 2-day period would be assigned to the state and the remaining costs would be shared on the basis of acres burned. Federal and state officials explained that, because the Blue Springs Fire qualified for assistance from the Federal Emergency Management Agency (FEMA), state officials agreed to bear a larger portion of the total fire suppression costs. For the Sunrise Complex of fires, in contrast, state officials were reluctant to share costs in the same manner. Although these fires also threatened the wildland-urban interface, they did not meet the eligibility requirements for FEMA reimbursement of nonfederal costs. Consequently, federal and nonfederal officials agreed to share costs for the Sunrise Complex on the basis of acres burned. The costs for the two fires we reviewed in Arizona were also treated differently from each other. For the Cave Creek Complex of fires, federal and state officials agreed to share suppression costs using an acres-burned method for the southern portion of the complex, which encompassed federal, state, and city lands and required substantial efforts to protect the wildland-urban interface. The federal government paid the full costs for the northern portion of the fire. For the Florida Fire, federal and nonfederal officials were unable to reach an agreement on how to share costs. Officials from the affected national forest proposed a cost-sharing agreement, whereby the state would pay the costs of firefighting personnel, equipment, and aircraft used to protect the wildland-urban interface, and all other fire suppression costs would be paid by the federal government. The state official, however, did not agree with this proposal. He believed that the Forest Service, not the state, was responsible for protecting areas of the wildland-urban interface threatened by the Florida Fire and that he was not authorized to agree to the terms of the proposed agreement. Methods used to share suppression costs for fires with similar characteristics also varied among states. For example, costs for the fires we reviewed in California and Colorado were shared using methods different from those used for similar fires we reviewed in Arizona and Utah. In California, federal and nonfederal officials agreed to share the costs of two fires using the cost-apportionment method--that is, costs were apportioned on the basis of where firefighting personnel and equipment were deployed. Officials said that they had often used this method since the mid-1980s because they believed that the benefit it provides in more equitable cost sharing among affected firefighting entities outweighs the additional time required to apportion the costs. In Colorado, federal and nonfederal officials agreed to share suppression costs for both of the fires we reviewed in that state using guidance they had developed and officially adopted in 2005, called "fire cost share principles." Under these principles, aviation costs for fires burning in the wildland-urban interface are shared equally for 72 hours, and other fire suppression costs, such as firefighting personnel and equipment, are shared on the basis of acres burned. Having clear guidance as to when particular cost-sharing methods should be used is important because the type of method ultimately agreed upon for any particular fire can have significant financial consequences for the firefighting entities involved. To illustrate the effect of the method chosen, we compared the distribution of federal and nonfederal costs for the five fires we reviewed in which the actual cost-sharing method used was not acres burned with what the distribution would have been if the method used had been acres burned. We found that the distribution of costs between federal and nonfederal entities differed, sometimes substantially, depending on the cost-sharing method used. The largest differences occurred in California, which used the cost apportionment method. For the Deep Fire, using the cost-apportionment method, federal entities paid $6.2 million, and nonfederal entities paid $2.2 million. Had the costs been shared on the basis of acres burned, federal entities would have paid an additional $1.7 million, and nonfederal entities would have paid that much less because most of the acres burned were on federal land. According to federal and state officials, the nonfederal entities bore a larger share of the cost than they would have under an acres-burned method because of the efforts to protect nonfederal lands and resources. For the Pine Fire, using cost apportionment, federal entities paid $5.2 million, and nonfederal entities paid $8.1 million. Had an acres-burned method been used, federal entities would have paid about $2 million less, and nonfederal entities would have paid that much more. According to a federal official who worked on apportioning costs for that fire, the higher costs that the federal entities paid under cost apportionment were largely due to extensive firefighting efforts on federal land to ensure that the fire was extinguished. In Colorado and Utah, the differences in federal and state entities' shares between the methods used and the acres-burned method were less pronounced, likely because the cost-sharing methods used still relied heavily on acres burned. In each case, federal entities' shares would have been more and nonfederal shares less had an acres-burned method been used, due to the efforts to protect the wildland-urban interface. For example, the federal share of costs for the Blue Springs Fire in Utah would have been about $400,000 more and the nonfederal share that much less if an acres-burned method had been used for the whole fire. In Colorado, we estimated that the federal share of costs for the Mason Gulch Fire would have been about $200,000 more and the nonfederal share that much less under an acres-burned method. Federal and nonfederal agency officials we interviewed raised a number of concerns about the current cost-sharing framework. First, some federal officials said that because master agreements and other policies do not provide clear guidance about which cost-sharing methods to use, it has sometimes been difficult to obtain a cost-sharing agreement that they believe shares suppression costs equitably. Second, nonfederal officials were concerned that the emergence of alternative cost-sharing methods has caused nonfederal entities to bear a greater share of fire suppression costs than in the past. Finally, some federal officials expressed concern that the current framework for sharing costs insulates state and local governments from the cost of protecting the wildland-urban interface, thereby reducing their incentive to take steps that could help mitigate fire risks and reduce suppression costs in the wildland-urban interface. We believe these concerns may reflect a more fundamental issue--that is, that federal and nonfederal entities have not clearly defined their financial responsibilities for wildland fire suppression, particularly for the wildland- urban interface. Some federal officials said that the lack of clear guidance can make it difficult to agree to use a cost-sharing method that they believe equitably distributes suppression costs between federal and nonfederal entities, particularly for fires that threaten the wildland-urban interface. As discussed, different cost-sharing methods were used for the two fires we reviewed in Utah, even though both fires required substantial suppression efforts to protect the wildland-urban interface. A federal official said that because of the state officials' unwillingness to use a method other than acres burned on one of the fires and because of the lack of clear guidance about which cost-sharing method should be used, he agreed to use an acres-burned method and did not seek a cost-sharing agreement that would have assigned more of the costs to the nonfederal entities. Some federal officials in Arizona expressed similar views, saying that the lack of clear guidance on sharing costs can make it difficult to reach agreement with nonfederal officials. For example, federal and state officials in Arizona did not agree on whether to share costs for one fire we reviewed in that state. Officials from the Forest Service's and the Department of the Interior's national offices agreed that interagency policies for cost sharing could be clarified to indicate under what circumstances particular cost-sharing methods are most appropriate. They said that the acres-burned method, for example, is likely not the most equitable method to share costs in cases where fires threaten the wildland-urban interface. Officials noted that the National Fire and Aviation Executive Board--made up of the fire directors from the five federal land management agencies and a representative from the National Association of State Foresters--was developing a template for both master and cost-sharing agreements. As of May 2006, this template had not been finalized, but our review of a draft version indicated that the template might not provide additional clarity about when each cost-sharing method should be used. While federal officials expressed the need for further guidance on how to share costs, nonfederal officials were concerned that the emergence of alternative cost-sharing methods was leading state and local entities to bear a greater share of suppression costs than in the past, and they questioned whether such an increase was appropriate. Nonfederal officials also said that wildland fire suppression costs already posed budgetary challenges for state and local entities and that using alternative cost- sharing methods more often could exacerbate the situation. State officials said that if a state's suppression costs in a given year exceed the funds budgeted, they must seek additional state funds, which can be difficult. Moreover, they said, in many states, protecting structures is primarily a local responsibility, and many local entities are unable to pay the costs of fighting a large fire that threatens the wildland-urban interface. Although clarifying guidance about which cost-sharing methods are most appropriate for particular circumstances could cause nonfederal entities to bear more wildland fire suppression costs, over the long term, such clarification would also allow each entity to better determine its budgetary needs and take steps to meet them. In addition to their concerns about increased costs, nonfederal as well as federal officials were concerned that the federal government was treating nonfederal entities in different states differently, thereby creating inequities. Federal and nonfederal officials said that because some states use particular cost-sharing methods more often than other states, the proportion of costs borne by federal and nonfederal entities likely varies from state to state, resulting in nonfederal entities' paying a higher proportion of costs in some states and a lower proportion in other states. Clarifying which cost-sharing methods should be used in particular situations could increase nonfederal officials' assurance that the federal government is treating them equitably relative to other states. Federal officials said that the current cost-sharing framework insulates state and local governments from the cost of protecting the wildland- urban interface. As we have previously reported, a variety of protective measures are available to help protect structures from wildland fire including (1) reducing vegetation and flammable objects within an area of 30 to 100 feet around a structure and (2) using fire-resistant roofing materials and covering attic vents with mesh screens. However, some homeowners and homebuilders resist using these protective measures because they are concerned about aesthetics, time, or cost. As a result, federal and nonfederal officials said, it can be politically difficult for state and local governments to adopt--and enforce--laws requiring such measures, and many at-risk areas have not done so. The states and communities we visited exhibited various degrees of progress in adopting laws requiring protective measures. For example, California requires homeowners in the wildland-urban interface to maintain 100 feet of defensible space and, in areas at particularly high risk from wildland fires, also requires new structures to be constructed with fire-resistant roofing materials and vents. The other states we visited do not have such statewide requirements, but they are taking a variety of steps to require or encourage protective measures. For example, Utah passed a law in 2004 requiring its counties to adopt standards for landscaping and building materials if they want to be eligible to receive state funds to assist with fire suppression costs. Other counties had efforts underway to educate homeowners about measures they could use to reduce their risk without requiring that such measures be used. Federal officials expressed concern--and some nonfederal officials acknowledged--that the use of cost-sharing methods that assign more costs to federal entities, and the availability of federal emergency assistance, insulate state and local governments from the cost of providing wildland fire protection. These federal officials pointed out that wildland fires threatening structures often require added suppression efforts. Under some cost-sharing methods, such as acres burned, federal entities often end up paying a large proportion of the costs for these efforts. Some federal and nonfederal officials also noted that the availability of FEMA assistance to nonfederal entities--which can amount to 75 percent of allowable fire suppression costs for eligible fires--further insulates state and local governments from the cost of protecting the wildland-urban interface. Of the eight fires included in our review, nonfederal officials were seeking reimbursement for the allowable costs of the five fires that FEMA determined met eligibility requirements. Federal officials suggested that to the extent that state and local governments are insulated from the cost of protecting the wildland-urban interface, these governments may have a reduced incentive to adopt laws requiring homeowners and homebuilders to use protective measures that could help mitigate fire risks. Some officials said that by requiring homeowners and homebuilders to take such measures, more of the cost of protecting the wildland-urban interface would then be borne by those who chose to live there. On the basis of our review of previous federal reports and interviews with federal and nonfederal officials, we believe that the concerns we identified may reflect a more fundamental issue--that federal and nonfederal firefighting entities have not clearly defined their fundamental financial responsibilities for wildland fire suppression, particularly those for protecting the wildland-urban interface. Federal officials said that the continuing expansion of the wildland-urban interface and rising fire suppression costs for protecting these areas have increased the importance of resolving these issues. Federal wildland fire management policy states that protecting structures is the responsibility of state, tribal, and local entities; but the policy also says that, under a formal fire protection agreement specifying the financial responsibilities of each entity, federal agencies can assist nonfederal entities in protecting the exterior of structures threatened by wildland fire. Federal and nonfederal officials agreed that federal agencies can assist with such actions, but they did not agree on which entities are responsible for bearing the costs of these actions. Federal officials told us that the purpose of this policy is to allow federal agencies to use their personnel and equipment to help protect homes but not to bear the financial responsibility of providing that protection. Nonfederal officials, however, said that these actions are intended to keep a wildland fire from reaching structures, and financial responsibility should therefore be shared between both federal and nonfederal entities. Further, the presence of structures adjacent to federal lands can substantially alter fire suppression strategies and raise costs. A previous federal report and federal officials have questioned which entities are financially responsible for suppression actions taken on federal lands but intended primarily or exclusively to protect adjacent wildland-urban interface. Fire managers typically use existing roads and geographic features, such as rivers and ridgelines, as firebreaks to help contain wildland fires. If, however, homes and other structures are located between a fire and such natural firebreaks, firefighters may have to construct other firebreaks and rely more than they otherwise would on aircraft to drop fire retardant to protect the structures, thereby increasing suppression costs. Nonfederal officials in several states, however, questioned the appropriateness of assigning to nonfederal entities the costs for suppression actions taken on federal lands. These officials, as well as officials from the National Association of State Foresters, said that accumulated fuels on federal lands is resulting in more severe wildland fires and contributing to the increased cost of fire suppression. They also said that federal agencies are responsible for keeping wildland fires from burning off federal land and should, therefore, bear the costs of doing so. Federal officials in the states we visited recognized this responsibility, but some also said that with the growing awareness that wildland fires are inevitable in many parts of the country, policy should recognize that wildland fires will occur and are likely to burn across jurisdictional boundaries. In their view, those who own property in areas at risk of wildland fires share a portion of the financial responsibility for protecting it. Previous federal agency reports also have recognized this issue and have called for clarifying financial responsibility for such actions. Wildland fires are inevitable and will continue to affect both federal and nonfederal lands and resources. Federal, state, and local firefighting entities have taken great strides to develop a cooperative fire protection system so that these entities can effectively work together to respond to these fires. Efforts are now needed to address how to best share the costs of these cooperative fire protection efforts when the fires burn or threaten multiple jurisdictions, particularly when suppression efforts may focus more heavily on one entity's lands and resources. The need for clear guidance on when to use a particular cost-sharing method is becoming more acute as the wildland-urban interface continues to grow and wildland fire suppression costs continue to increase. Before such guidance can be developed, however, federal and nonfederal entities must agree on which entity is responsible for the costs of protecting areas where federal and nonfederal lands and resources are adjacent or intermingled, particularly in the wildland-urban interface. Without explicit delineation of financial responsibilities, federal and nonfederal entities' concerns about how these costs are shared are likely to continue. Thus, to strengthen the framework for sharing wildland fire suppression costs, we recommended that the Secretaries of Agriculture and the Interior, working in conjunction with relevant state entities, provide more specific guidance as to when particular cost-sharing methods should be used and clarify the financial responsibilities for suppressing fires that burn, or threaten to burn, across multiple jurisdictions. In responding to our report, the Forest Service and the Department of the Interior generally agreed with the findings and recommendations. The National Association of State Foresters did not agree, stating that developing national guidance would not provide the flexibility needed to address the variability in local circumstances and state laws. Although we agree that a certain amount of flexibility is needed, without more explicit guidance to assist local federal and nonfederal officials responsible for developing cost-sharing agreements for individual fires, the inconsistencies in how suppression costs are shared within and among states are likely to continue, along with concerns about perceived inequities. Mr. Chairman, this concludes my prepared 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 about this testimony, please contact me at (202) 512-3841 or [email protected], or Robin M. Nazzaro at (202) 512-3841 or [email protected]. David P. Bixler, Assistant Director; Jonathan Dent; Janet Frisch; and Richard Johnson made key contributions to this statement. This is a work of the U.S. government and is not subject to copyright protection in the United States. It may be reproduced and distributed in its entirety without further permission from GAO. However, because this work may contain copyrighted images or other material, permission from the copyright holder may be necessary if you wish to reproduce this material separately.

Wildland fires can burn or threaten both federal and nonfederal lands and resources, including homes in or near wildlands, an area commonly called the wildland-urban interface. Agreements between federal and nonfederal firefighting entities provide the framework for working together and sharing the costs of fire suppression efforts. GAO was asked to (1) review how federal and nonfederal entities share the costs of suppressing fires that burn or threaten both of their lands and resources and (2) identify any concerns that these entities may have with the existing cost-sharing framework. This testimony is based on GAO's May 2006 report Wildland Fire Suppression: Lack of Clear Guidance Raises Concerns about Cost Sharing between Federal and Nonfederal Entities (GAO-06-570). Federal and nonfederal entities used a variety of methods to share the costs of fighting wildland fires affecting both of their lands and resources. Cooperative agreements between federal and nonfederal firefighting entities--which are developed and agreed to by the entities involved--provide the framework for cost sharing and typically list several cost-sharing methods available to the entities. The agreements GAO reviewed, however, often lacked clear guidance for federal and nonfederal officials to use in deciding which method to apply to a specific fire. As a result, cost-sharing methods were applied inconsistently within and among states, even for fires with similar characteristics. For example, GAO found that in one state, the costs for suppressing a large fire that threatened homes were shared solely according to the proportion of acres burned within each entity's area of fire protection responsibility, a method that traditionally has been used. Yet, costs for a similar fire within the same state were shared differently. For this fire, the state agreed to pay for certain aircraft and fire engines used to protect the wildland-urban interface, while the remaining costs were shared on the basis of acres burned. In contrast to the two methods used in this state, officials in another state used yet a different cost-sharing method for two similar large fires that threatened homes, apportioning costs each day for personnel, aircraft, and equipment deployed on particular lands, such as the wildland-urban interface. The type of cost-sharing method ultimately used is important because it can have significant financial consequences for the entities involved, potentially amounting to millions of dollars. Both federal and nonfederal agency officials raised a number of concerns about the current cost-sharing framework. First, some federal officials were concerned that because guidance is unclear about which cost-sharing methods are most appropriate in particular circumstances, it can be difficult to reach agreement with nonfederal officials on a method that all parties believe distributes suppression costs equitably. Second, some nonfederal officials expressed concerns that the emergence of alternative cost-sharing methods is causing nonfederal entities to bear a greater share of fire suppression costs than in the past. In addition, both federal and nonfederal officials believed that the inconsistent application of these cost-sharing methods has led to inequities among states in the proportion of costs borne by federal and nonfederal entities. Finally, some federal officials also expressed concern that the current framework for sharing costs insulates state and local governments from the increasing costs of protecting the wildland-urban interface. Therefore, nonfederal entities may have a reduced incentive to take steps that could help mitigate fire risks, such as requiring homeowners to use fire-resistant materials and landscaping. On the basis of a review of previous federal reports and interviews with federal and nonfederal officials, GAO believes that these concerns may reflect a more fundamental issue--that federal and nonfederal entities have not clearly defined their basic financial responsibilities for wildland fire suppression, particularly those for protecting the wildland-urban interface.

The United States is currently undergoing a transition from analog to digital broadcast television. With traditional analog technology, pictures and sounds are converted into "waveform" electrical signals for transmission through the radiofrequency spectrum, while digital technology converts these pictures and sounds into a stream of digits consisting of zeros and ones for transmission. Digital transmission of television signals provides several advantages compared to analog transmission, such as enabling better quality picture and sound reception as well as using the radiofrequency spectrum more efficiently than analog transmission. This increased efficiency makes multicasting--where several digital television signals are transmitted in the same amount of spectrum necessary for one analog television signal--and HDTV services possible. A primary goal of the DTV transition is for the federal government to reclaim spectrum that broadcasters currently use to provide analog television signals. The radiofrequency spectrum is a medium that enables many forms of wireless communications, such as mobile telephone, paging, broadcast television and radio, private radio systems, and satellite services. Because of the virtual explosion of wireless applications in recent years, there is considerable concern that future spectrum needs-- both for commercial as well as government purposes--will not be met. The spectrum that will be cleared at the end of the DTV transition is considered highly valuable spectrum because of its particular technical properties. In all, the DTV transition will clear 108 megahertz of spectrum--a fairly significant amount. In the Balanced Budget Act of 1997, the Congress directed FCC to reallocate 24 MHz of the reclaimed spectrum to public safety uses. Since the terrorist attacks of September 11, 2001, there has been a greater sense of urgency to free spectrum for public safety purposes. The remaining returned spectrum will be auctioned for use in advanced wireless services, such as wireless high-speed Internet access. To implement the DTV transition, television stations must provide a digital signal, which requires them to upgrade their transmission facilities, such as transmission lines, antennas, and digital transmitters and encoders. Depending on individual station's tower configuration, the digital conversion may require new towers or upgrades to existing towers. Most television stations throughout the country are now providing a digital broadcast signal in addition to their analog signal. After 2006, the transition will end in each market--that is, analog signals will no longer be provided--when at least 85 percent of households have the ability to receive digital broadcast signals. The three primary means through which Americans view television signals are over the air, cable, and direct broadcast satellite (DBS). Over-the-air broadcast television, which began around 1940, uses radiofrequencies to transmit television signals from stations' television towers to households' television antennas mounted on rooftops, in attics, or directly on television sets. Over-the-air television is a free service. Cable television service, a pay television service, emerged in the late 1940s to fill a need for television service in areas with poor over-the-air reception, such as mountainous or remote areas. Cable providers run localized networks of cable lines that deliver television signals from cable facilities to subscribers' homes. Cable operators provide their subscribers with, on average, approximately 73 analog television channels and 150 digital television channels. In 1994, a third primary means of providing television emerged: direct broadcast satellite (DBS). Subscribers to DBS service use small reception dishes that can be mounted on rooftops or windowsills to receive television programming beamed down from satellites that orbit over the equator. Like cable, DBS service is a subscription television service that provides consumers with many channels of programming. When the Congress enacted the Satellite Home Viewer Improvement Act of 1999, it allowed DBS carriers to provide local broadcast signals--such as the local affiliate of ABC or NBC--which they had previously not generally been able to provide. Over-the-Air Households. We found that 19 percent, or 20.8 million American households, rely exclusively on over-the-air transmissions for their television viewing. We recognize that others have estimated a lower value for the percent of households relying on over the air television. Our results were derived from a survey of over 2,400 households, from which we estimated with 95 percent certainty that between 17 and 21 percent of households rely on over the air television. Compared to households that purchase a subscription to cable or DBS service, we found that exclusive over-the-air viewers are somewhat different demographically. Overall, over-the-air households are more likely to have lower incomes than cable or satellite households. Approximately 48 percent of exclusive over-the-air viewers have household incomes less than $30,000, and 6 percent have household incomes over $100,000. Additionally, nonwhite and Hispanic households are more likely to rely on over-the-air television than are white and non-Hispanic households; over 23 percent of non-white households rely on over-the-air television compared to less than 16 percent of white households, and about 28 percent of Hispanic households rely on over-the- air television compared to about 17 percent of non-Hispanic households. Finally, we found that, on average, exclusive over-the-air households have 2.1 televisions, which is lower than the average for cable and satellite households. We asked the survey research firm to recontact approximately 100 of the respondents who exclusively watch television through over-the-air transmission to ask additional questions, including the primary reason the household does not purchase a subscription video service. Forty-one of these respondents said that it was too costly for them to purchase a subscription video service, and 44 said that they do not watch enough television to warrant paying for television service. Most of the recontacted households seemed unlikely to purchase a subscription service in the near future. Only 18 of the recontacted households said that they would be likely to purchase a subscription video service in the near future, and another 10 said that they might do so. Cable Households. We found that 57 percent, or 63.7 million American households, view television through a cable service. On average, cable households have 2.7 television sets. Sixteen percent of cable households have at least one television set in the home that is not connected to cable but instead receives only over-the-air television signals. Of the cable households surveyed, roughly 29 percent had household incomes of less than or equal to $30,000, and about 13 percent had incomes exceeding $100,000. We also found that 44 percent of the cable homes have at least one set-top box. Of those cable subscribers with a set-top box, about 67 percent reported that their box is capable of viewing channels the cable system sells on "digital cable tiers," meaning that the channels are transmitted by their cable provider in a digital format. A subset of these "digital cable" customers have a special set-top box capable of receiving their providers' transmission of high-definition digital signals. Because the existence of a set-top box in the home may be relevant for determining what equipment households would need to view broadcast digital television signals, we asked the survey research firm to recontact approximately 100 cable households that do not have a set-top box to ask questions about their likely purchase of digital cable tiers--which require a set-top box--in the near future. First, we asked the primary reason why the household did not currently purchase any cable digital tiers of programming. Fifty-one of the recontacted respondents said that they did not want to bear the extra expense of digital tiers of cable programming, and 33 said that they did not watch enough television to justify purchasing digital cable service. Only 9 of the recontacted respondents said that they would be likely to purchase digital cable service in the near future, and another 9 said that they might purchase such service in the near future. Finally, we asked these respondents whether they would be reluctant to change their service in any way that would require them to use a set-top box. Of the recontacted respondents, 37 said they would be very reluctant to change their service in a way that would require them to use a set-top box, and another 38 said that they would be somewhat reluctant to do so. DBS Households. We found that about 19 percent, or 21.7 million American households, have a subscription to a DBS service. These households have, on average, 2.7 television sets. About one-third of these households have at least one television set that is not hooked to their DBS dish and only receives over-the-air television signals. In terms of income, 29 percent of DBS subscribers have incomes less than or equal to $30,000, and 13 percent have incomes exceeding $100,000. One important difference between cable and DBS service is that not all DBS subscribers have the option of viewing local broadcast signals through their DBS provider. Although the DBS providers have been rolling out local broadcast stations in many markets around the country in the past few years, not all markets are served. DBS subscribers in markets without local broadcast signals available through their DBS provider usually obtain their local broadcast signals through an over-the-air antenna, or through a cable connection. This is important to the DTV transition because how households with DBS service view their local broadcast channels will play into the determination of their requirements to transition to broadcast DTV. We therefore requested that the survey research firm recontact approximately 100 DBS customers to ask how they receive their local broadcast channels. We found that when local channels are available to DBS subscribers, they are very likely to purchase those channels. Well more than half of the DBS subscribers who were recontacted viewed their local broadcast channels through their DBS service. Nearly one-fourth of the recontacted DBS subscribers view their local broadcast channels through free over-the-air television. As DBS providers continue to roll out local channels to more markets, the percentage of DBS subscribers relying on over-the-air transmissions to view local signals will likely decline. The specific equipment needs for each household to transition to DTV-- that is, to be able to view broadcast digital signals--depends on certain key factors: the method through which a household watches television, the television equipment the household currently has, and certain critical regulatory decisions yet to be made. In this section we discuss two cases regarding a key regulatory decision that will need to be made and the implications that decision will have on households' DTV equipment needs. Before turning to the two cases, a key assumption underlying this analysis must be discussed. Currently, broadcasters have a right to insist that cable providers carry their analog television signals. This is known as the "must carry" rule, and dates to the Cable Television Consumer Protection and Competition Act of 1992. FCC made a determination that these must carry rules will apply to the digital local broadcast signals once a station is no longer transmitting an analog signal. In our analysis, we assume that the must carry right applies to broadcasters' digital signals, and as such, cable providers are generally carrying those signals. DBS providers face some must carry rules as well, although they are different in some key respects from the requirements that apply to cable providers. For the purposes of this analysis, we assume that to the extent that DBS providers face must carry requirements, those requirements apply to the digital broadcast signals. For nearly all cable subscribers, and more than half of the DBS subscribers, local broadcast analog signals are provided by their subscription television provider. This means that these providers capture the broadcasters' signals through an antenna or a wire and retransmit those signals by cable or DBS to subscribers. We make two disparate assumptions, which we call case one and case two, about how cable and DBS providers might provide digital broadcast signals to subscribers. We do not suggest that these are the only two possibilities regarding how the requirements for carriage of broadcast signals might ultimately be decided--these are simply two possible scenarios. Case One. In this case, we assume that cable and DBS providers will continue providing broadcasters' signals as they currently do. This assumption would be realized if cable and DBS providers initially downconvert broadcasters' digital signals at the providers' facilities, which may require legislative or regulatory action. That is, cable providers would initially downconvert broadcasters' high-definition digital signals to an analog format before they are transmitted to their subscribers. Similarly, DBS providers would initially downconvert broadcasters' high- definition digital signals to a standard-definition digital format before they are transmitted to their subscribers. In this case, there would be no need for cable and DBS subscribers to acquire new equipment; only households viewing television using only an over-the-air antenna must take action to be able to view broadcasters' digital signals. This case shares many attributes with the recently-completed DTV transition in Berlin, Germany. All over-the-air households--which account for approximately 21 million households in the United States--must do one of two things to be able to view digital broadcast signals. First, they could purchase a digital television set that includes a tuner capable of receiving, processing, and displaying a digital signal. The survey data we used indicated that only about 1 percent of over-the-air viewers have, as of now, purchased a digital television that contains a tuner. However, some large televisions sold today are required to include such a tuner and by July 2007, all television sets larger than 13 inches are required to include a tuner. After that time, consumers who purchase new television sets will automatically have the capability of viewing digital signals. Approximately 25 to 30 million new television sets are purchased each year in the United States. The second option available to over-the-air households is to purchase a digital-to-analog set-top box. That is, for those households that have not purchased a new television set, the set-top box will convert the digital broadcast signals to analog so that they can be viewed on an existing analog television set. Viewers with digital-to-analog set-top boxes would not actually see the broadcast digital signal in a digital format, but would be viewing that signal after it has been downconverted, by the set-top box, to be compatible with their existing analog television set. Currently, simple set-top boxes that only have the function of downconverting digital signals to analog are not on the market. More complex boxes that include a variety of functions and features, including digital to analog downconversion, are available, but at a substantial cost. However, manufacturers told us that simple, and less expensive, set-top boxes would come to the market when a demand for them develops. Case Two. In the second case, we assume that cable and DBS companies would be required to provide the broadcasters' signals to their subscribers in substantially the same format as it was received from the broadcasters. Because some of the broadcasters' signals are in a high-definition digital format, cable and DBS subscribers--just like over-the-air households-- would need to have the equipment in place to be able to receive high- definition digital signals. There are several ways these subscribers could view these signals: Cable or DBS subscribers would be able to view digital broadcast television if they have purchased a digital television set with an over-the- air digital tuner. They would then have the capability of viewing local digital broadcast stations through a traditional television antenna--just like an over-the-air viewer. However, many cable and DBS households may want to continue to view broadcast television signals through their cable or DBS provider. Cable or DBS subscribers could purchase a digital television with a "cable card" slot. By inserting a "card" provided by the cable company into such a television, subscribers can receive and display the digital content transmitted by the cable provider. Only very recently, however, have cable-ready digital television sets--which allow cable subscribers to receive their providers' digital signals directly into the television set-- come to the market. Similar televisions sets with built-in tuners for satellite digital signals are not currently on the market. To view the high-definition signals transmitted by their subscription provider, the other possibility for cable and DBS households would be to have a set-top box that downconverts the signals so that they can be displayed on their existing analog television sets. That is, any downconversion in this scenario takes place at the subscribers' household, as opposed to the subscription television providers' facilities, as in case one. While all DBS subscribers and about a third of cable subscribers have set-top boxes that enable a digital signal from their provider to be converted to an analog signal for display on existing television sets, few of these set-top boxes are designed for handling high-definition digital signals. As such, if broadcasters' signals are transmitted by cable and DBS providers in a high-definition format, not all cable and satellite subscribers would need new equipment, although most would. In case two, as in case one, all exclusively over-the-air households need a digital television set or a set-top box. In this section we present the estimated cost of providing a subsidy to consumers for the purchase of a set-top box that would be designed to advance the digital television transition. The estimated subsidy costs presented here vary based on (1) the two cases discussed above about whether cable and DBS providers initially downconvert broadcasters' digital signals at their facilities before transmitting them to subscribers; (2) varied assumptions about whether a means test is imposed and, if so, at what level; and (3) the expected cost of a simple digital-to-analog set-top box. All of the estimates presented here assume that only one television set is subsidized in each household that is determined to be eligible for the subsidy. Means test. Imposing a means test would limit the subsidy to only those households determined to be in financial need of a subsidy. A means test would limit eligibility for the subsidy to only those households with incomes lower than some specified limit. We employed two different levels of means tests. The scenarios with means tests are roughly based on 200 percent and 300 percent of the poverty level as the income threshold under which a household's income must lie to be eligible for the subsidy. The poverty level is determined based on both income and the number of persons living in the household; for a family of four the official federal poverty level in 2004 was $18,850. Set-top boxes. We provide estimates based on two possible price levels for the boxes: $50 and $100. This range is based on conversations we had with consumer electronics manufacturers who will likely produce set-top boxes in the future. Set-top boxes for cable and DBS are often rented by subscribers, rather than purchased. Nevertheless, in cases where cable and DBS subscribers need new equipment, we assume that the financial support provided to them would be equivalent to that provided to over-the- air households. Table 1 provides the cost of a subsidy program under the assumption that cable and DBS providers downconvert broadcasters' signals at their facilities in a manner that enables them to continue to transmit those signals to subscribers as they currently transmit broadcasters' signals. In this case, cable or DBS subscribers do not require any new equipment, so only over-the-air households--approximately 21 million American households--would need new equipment. As shown in table 1, there is considerable variation in the cost of the subsidy program depending on the level of a means test and the price of the set-top box. Table 2 provides the cost of a subsidy program under the assumption that cable and DBS providers are required to transmit broadcasters' digital signals in the same format as they are received. Under this scenario, nearly all over-the-air households and most cable and DBS subscribers will not have the equipment in place to view high-definition digital broadcast signals. Although subscribers typically rent, rather than purchase, set-top boxes, we assume that the same level of subsidy is provided to these households as is provided to over-the-air households to defray the cost of having to obtain a new or upgraded set-top box from their provider. There are two issues that stand as important caveats to the analyses we have presented on estimated set-top box subsidy costs. The first is that we based the majority of the analyses on survey results that provide information on the status of American television households as of early 2004. Over the next several years, new households will be established, some households might change the means through which they watch television, televisions sets with integrated digital over-the-air tuners as well as digital cable compatibility will be purchased, and some cable and DBS households will have obtained set-top boxes capable of receiving high-definition digital signals from their providers. Households' purchase of certain new equipment could obviate the need for a subsidy for new television equipment. For example, some households may purchase a digital television set with an over-the-air tuner and begin to view digital broadcast signals in this manner; some large televisions sold today are required to include such a tuner and by July 2007, all television sets larger than 13 inches are required to include a tuner. In time, these factors could have the effect of reducing the cost of a set-top box subsidy because fewer households would need to be subsidized. The second caveat to these analyses is that these subsidy estimates do not include any costs associated with implementing a subsidy program. If the federal government determines that it would be worthwhile to provide this subsidy, the subsidy would need to be administered in some fashion, such as through a voucher system, a tax credit, a mail-in rebate, government distribution of equipment, or some other means. Any of these methods would impose costs that could be significant for the federal government and any other entities involved in administering the program. Such costs would be difficult to estimate until a host of decisions are made about how a subsidy program would be administered. As I mentioned earlier, our work on the DTV transition continues, and we will provide more information in a report later this year. We will discuss various ways that a subsidy program might be administered and provide some analysis of the benefits and drawbacks of these various methods. We will also provide a discussion of how information regarding the DTV transition and any associated subsidy program might best be provided to the American people. 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 questions regarding this testimony, please contact Mark L. Goldstein on (202) 512-2834 or [email protected]. Individuals making key contributions to this testimony included Amy Abramowitz, Dennis Amari, Michael Clements, Andy Clinton, Michele Fejfar, Simon Galed, Eric Hudson, Catherine Hurley, Bert Japikse, Sally Moino, Karen O'Conor, and Madhav Panwar. To obtain information on the types of television service and equipment used by U.S. households, we purchased existing survey data from Knowledge Networks Statistical Research. Their survey was completed with 2,375 of the estimated 5,075 eligible sampled individuals for a response rate of 47 percent; partial interviews were conducted with an additional 96 people, for a total of 2,471 individuals completing some of the survey questions. The survey was conducted between February 23 and April 25, 2004. The study procedures yielded a sample of members of telephone households in the continental United States using a national random-digit dialing method. Survey Sampling Inc. (SSI) provided the sample of telephone numbers, which included both listed and unlisted numbers and excluded blocks of telephone numbers determined to be nonworking or business-only. At least five calls were made to each telephone number in the sample to attempt to interview a responsible person in the household. Special attempts were made to contact refusals and convert them into interviews; refusals were sent a letter explaining the purpose of the study and an incentive. Data were obtained from telephone households and are weighted by the number of household telephone numbers. As with all sample surveys, this survey is subject to both sampling and nonsampling errors. The effect of sampling errors due to the selection of a sample from a larger population can be expressed as a confidence interval based on statistical theory. The effects of nonsampling errors, such as nonresponse and errors in measurement, may be of greater or lesser significance but cannot be quantified on the basis of available data. Sampling errors arise because of the use of a sample of individuals to draw conclusions about a much larger population. The study's sample of telephone numbers is based on a probability selection procedure. As a result, the sample was only one of a large number of samples that might have been drawn from the total telephone exchanges from throughout the country. If a different sample had been taken, the results might have been different. To recognize the possibility that other samples might have yielded other results, we express our confidence in the precision of our particular sample's results as a 95 percent confidence interval. We are 95 percent confident that when only sampling errors are considered each of the confidence intervals in this report will include the true values in the study population. All percentage estimates from the survey have margins of error of plus or minus 6 percentage points or less, unless otherwise noted. In addition to the reported sampling errors, the practical difficulties of conducting any survey introduce other types of errors, commonly referred to as nonsampling errors. For example, questions may be misinterpreted, some types of people may be more likely to be excluded from the study, errors could be made in recording the questionnaire responses into the computer-assisted telephone interview software, and the respondents' answers may differ from those who did not respond. Knowledge Networks has been fielding versions of this survey for over 20 years. In addition, to reduce measurement error, Knowledge Networks employs interviewer training, supervision, and monitoring, as well as computer-assisted interviewing to reduce error in following skip patterns. For this survey, the 47 percent response rate is a potential source of nonsampling error; we do not know if the respondents' answers are different from the 53 percent who did not respond. Knowledge Networks took steps to maximize the response rate--the questionnaire was carefully designed and tested through deployments over many years, at least five telephone calls were made at varied time periods to try to contact each telephone number, the interview period extended over about 8 weeks, and attempts were made to contact refusals and convert them into interviews. Because we did not have information on those contacted who chose not to participate in the survey, we could not estimate the impact of the nonresponse on our results. Our findings will be biased to the extent that the people at the 53 percent of the telephone numbers that did not yield an interview have different experiences with television service or equipment than did the 47 percent of our sample who responded. However, distributions of selected household characteristics (including presence of children, race, and household income) for the sample and the U.S. Census estimate of households show a similar pattern. To assess the reliability of these survey data, we reviewed documentation of survey procedures provided by Knowledge Networks, interviewed knowledgeable officials about the survey process and resulting data, and performed electronic testing of the data elements used in the report. We determined that the data were sufficiently reliable for the purposes of this report. Due to limitations in the data collected, we made several assumptions in the analysis. Number of televisions and number of people in the household were reported up to five; households exceeding four for either variable were all included in the category of five or more. For the purposes of our analyses, we assumed that households had no more than five televisions that would need to be transitioned and no more than five people. Number of people in the household was only used in calculating poverty, but may result in an underestimate of those households in poverty. Calculations of poverty were based on the 2004 Poverty Guidelines for the 48 contiguous states and the District of Columbia, published by the Department of Health and Human Services. We determined whether or not each responding household would be considered poor at roughly 200 percent and 300 percent of the poverty guidelines. Income data were reported in categories so the determination of whether or not a household met the 200 percent or 300 percent threshold required approximation, and for some cases this approximation may have resulted in an overestimate of the number of poor households. In addition, income data were missing for 24 percent of the respondents. To conduct the analyses involving poverty, we assumed that the distribution of those in varying poverty status was the same for those reporting and not reporting income data. Comparisons of those reporting and not reporting income data show some possible differences on variables examined for this report; however, the income distribution is very close to the 2003 income estimates published by the U.S. Census Bureau. To determine total numbers of U.S. households affected by the transition and total cost estimates for various transition scenarios, we used the U.S. Census Bureau's Current Population Survey estimate of the total number of households in the United States as of March 2004. To derive the total number of households covered by the various scenarios, we multiplied this estimate by the proportions of households covered by the scenarios derived from the survey data. The standard error for the total number of U.S. households was provided by the Census Bureau, and the standard errors of the total number of households covered by the scenarios take into account the variances of both the proportions from the survey data and the total household estimate. All cost estimates based on the survey data have margins of error of plus or minus 16 percent or less. In addition, we contracted with Knowledge Networks to recontact a sample of their original 2004 survey respondents in October 2004. Households were randomly selected from each of three groups: broadcast- only television reception, cable television service without a set-top box, and satellite television service. For each group, 102 interviews were completed, yielding 306 total respondents (for a 63 percent response rate). To reduce measurement error, the survey was pretested with nine respondents, and Knowledge Networks employed interviewer training, supervision, and monitoring, as well as computer-assisted interviewing, to reduce error in following skip patterns. Due to the small sample size, the findings of these questions are not generalizable to a larger population. 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 digital television (DTV) transition offers the promise of enhanced television services. At the end of the transition, radiofrequency spectrum used for analog broadcast television will be used for other wireless services and for critical public safety services. To spur the digital transition, some industry participants and experts have suggested that the government may choose to provide a subsidy for settop boxes, which can receive digital broadcast television signals and convert them into analog signals so that they can be displayed on existing television sets. This testimony provides information on (1) the current distribution of American households by television viewing methods and whether there are demographic differences among these groups; (2) the equipment required for households to receive digital broadcast signals; and (3) the estimated cost to the federal government, under various scenarios, of providing a subsidy for set-top boxes that would enable households to view digital broadcast signals. We developed estimates of the cost of a subsidy for set-top boxes using data on household television characteristics, expected set-top box costs, and varied assumptions about how certain key regulatory issues will be decided. The three primary means through which Americans view television signals are over the air, cable, and direct broadcast satellite (DBS). GAO found that 19 percent, or roughly 21 million American households, rely exclusively on free over-the-air television; 57 percent, or nearly 64 million households, view television via a cable service; and 19 percent, or about 22 million households, have a subscription to a direct broadcast satellite (DBS) service. On average, over-the-air households are more likely to have lower incomes compared to cable and DBS households. While 48 percent of over-the-air households have incomes under $30,000, roughly 29 percent of cable and DBS households have incomes less than that level. Also, 6 percent of overthe- air households have incomes over $100,000, while about 13 percent of cable and DBS households have incomes exceeding $100,000. The specific equipment that each household needs to transition to DTV--that is, to be able to view digital broadcast signals--depends on the method through which the household watches television, whether the household has already upgraded its television equipment to be compatible with DTV, and the resolution of certain key regulatory issues. GAO examined two key cases regarding the regulatory issues. The assumption for case one is that cable and DBS providers would continue providing broadcasters' signals as they currently do, thus eliminating the need for their subscribers to acquire new equipment. In this case, only households viewing television using only an over-the-air antenna would need to take action to be able to view broadcasters' digital signals. The assumption for the second case is that cable and DBS providers would be required to provide broadcasters' digital signals to subscribers in substantially the same format as broadcasters transmitted those signals. This would require cable and DBS subscribers, in addition to over-the-air households, to have equipment in place to be able to receive their providers' high-definition digital signals. If a subsidy for set-top boxes is only needed for over-the-air households (case one), GAO estimates that its cost could range from about $460 million to about $2 billion, depending on the price of the set-top boxes and whether a means test--which would limit eligibility to only those households with incomes lower than some specified limit--is employed. If cable and satellite subscribers also need new equipment (case two), the cost of providing the subsidy could range from about $1.8 billion to approximately $10.6 billion. We provided a draft of this testimony to the Federal Communications Commission (FCC) for their review and comment. FCC staff provided technical comments that we incorporated where appropriate.

Intellectual property is an important component of the U.S. economy, and the United States is an acknowledged global leader in the creation of intellectual property. However, industries estimate that annual losses stemming from violations of intellectual property rights overseas are substantial. Further, counterfeiting of products such as pharmaceuticals and food items fuels public health and safety concerns. USTR's Special 301 reports on the adequacy and effectiveness of intellectual property protection around the world demonstrate that, from a U.S. perspective, intellectual property protection is weak in developed as well as developing countries and that the willingness of countries to address intellectual property issues varies greatly. Eight federal agencies, as well as the Federal Bureau of Investigation (FBI) and the U.S. Patent and Trademark Office (USPTO), undertake the primary U.S. government activities to protect and enforce U.S. intellectual property rights overseas. The agencies are the Departments of Commerce, State, Justice, and Homeland Security; USTR; the Copyright Office; the U.S. Agency for International Development (USAID); and the U.S. International Trade Commission. The efforts of U.S. agencies to protect U.S. intellectual property overseas fall into three general categories--policy initiatives, training and technical assistance, and U.S. law enforcement actions. U.S. policy initiatives to increase intellectual property protection around the world are primarily led by USTR, in coordination with the Departments of State and Commerce, USPTO, and the Copyright Office, among other agencies. A centerpiece of policy activities is the annual Special 301 process. "Special 301" refers to certain provisions of the Trade Act of 1974, as amended, that require USTR to annually identify foreign countries that deny adequate and effective protection of intellectual property rights or fair and equitable market access for U.S. persons who rely on intellectual property protection. USTR identifies these countries with substantial assistance from industry and U.S. agencies and publishes the results of its reviews in an annual report. Once a pool of such countries has been determined, the USTR, in coordination with other agencies, is required to decide which, if any, of these countries should be designated as a Priority Foreign Country (PFC). If a trading partner is identified as a PFC, USTR must decide within 30 days whether to initiate an investigation of those acts, policies, and practices that were the basis for identifying the country as a PFC. Such an investigation can lead to actions such as negotiating separate intellectual property understandings or agreements between the United States and the PFC or implementing trade sanctions against the PFC if no satisfactory outcome is reached. Between 1994 and 2005, the U.S. government designated three countries as PFCs--China, Paraguay, and Ukraine--as a result of intellectual property reviews. The U.S. government negotiated separate bilateral intellectual property agreements with China and Paraguay to address IPR problems. These agreements are subject to annual monitoring, with progress cited in each year's Special 301 report. Ukraine, where optical media piracy was prevalent, was designated a PFC in 2001. The United States and Ukraine found no mutual solution to the IPR problems, and in January 2002, the U.S. government imposed trade sanctions in the form of prohibitive tariffs (100 percent) aimed at stopping $75 million worth of certain imports from Ukraine over time. In conjunction with the release of its 2005 Special 301 report, USTR announced the results of a detailed review examining China's intellectual property regime. This review concluded that infringement levels remain unacceptably high throughout China, despite the country's efforts to reduce them. The U.S. government identified several actions it intends to take, including working with U.S. industry with an eye toward utilizing World Trade Organization (WTO) procedures to bring China into compliance with its WTO intellectual property obligations (particularly those relating to transparency and criminal enforcement) and securing new, specific commitments concerning actions China will take to improve IPR protection and enforcement. By virtue of membership in the WTO, the United States and other countries commit themselves not to take WTO-inconsistent unilateral action against possible trade violations involving IPR protections covered by the WTO but to instead seek recourse under the WTO's dispute settlement system and its rules and procedures. This may impact any U.S. government decision regarding whether to retaliate against WTO members unilaterally with sanctions under the Special 301 process when those countries' IPR problems are viewed as serious. The United States has brought a total of 12 IPR cases to the WTO for resolution, but has not brought any since 2000 (although the United States initiated a WTO dispute panel for one of these cases in 2003). A senior USTR official emphasized that this is due to the effectiveness of tools such as the Special 301 process in encouraging WTO members to bring their laws into compliance with WTO intellectual property rules. In addition, most of the agencies involved in efforts to promote or protect IPR overseas engage in some training or technical assistance activities. Key activities to develop and promote enhanced IPR protection in foreign countries are undertaken by the Departments of Commerce, Homeland Security, Justice, and State; the FBI; USPTO; the Copyright Office; and USAID. Training events sponsored by U.S. agencies to promote the enforcement of intellectual property rights have included enforcement programs for foreign police and customs officials, workshops on legal reform, and joint government-industry events. According to a State Department official, U.S. government agencies have conducted intellectual property training for a number of countries concerning bilateral and multilateral intellectual property commitments, including enforcement, during the past few years. For example, intellectual property training has been conducted by numerous agencies in Poland, China, Morocco, Italy, Jordan, Turkey, and Mexico. A small number of agencies are involved in enforcing U.S. intellectual property laws, and the nature of these activities differs from other U.S. government actions related to intellectual property protection. Working in an environment where counterterrorism is the central priority, the FBI and the Departments of Justice and Homeland Security take a variety of actions that include engaging in multicountry investigations involving intellectual property violations and seizing goods that violate intellectual property rights at U.S. ports of entry. The Department of Justice has an office that directly addresses international IPR problems. Further, Justice has been involved with international investigation and prosecution efforts and, according to a Justice official, has become more aggressive in recent years. For instance, Justice and the FBI coordinated an undercover IPR investigation, with the involvement of several foreign law enforcement agencies. The investigation focused on individuals and organizations, known as "warez" release groups, which specialize in the Internet distribution of pirated materials. In April 2004, these investigations resulted in 120 simultaneous searches worldwide (80 in the United States) by law enforcement entities from 10 foreign countries and the United States in an effort known as "Operation Fastlink." In addition, in March 2004, the Department of Justice created an intellectual property task force to examine all of Justice's intellectual property enforcement efforts and explore methods for the department to strengthen its protection of IPR. A report issued by the task force in October 2004 provided recommendations for improvements in criminal enforcement, international cooperation, civil and antitrust enforcement, legislation, and prevention of intellectual property crime. Some of these recommendations have been implemented, while others have not. For example, Justice has implemented a recommendation to create five additional Computer Hacking and Intellectual Property (CHIP) units to prosecute IPR crimes. Additionally, Justice has designated a CHIP coordinator in every U.S. Attorney's office in the country, thereby implementing a report recommendation that such action be taken. However, an FBI official told us the FBI has not been able to implement recommendations such as posting additional personnel to the U.S. consulate in Hong Kong and the U.S. embassy in Budapest, Hungary for budgetary reasons; Justice has not yet implemented a similar recommendation to deploy federal prosecutors to these same regions and designate them as Intellectual Property Law Enforcement Coordinators. Fully implementing some of the report's recommendations will require a sustained, long-term effort by Justice. For example, to address a recommendation to develop a national education program to prevent intellectual property crime, Justice held two day-long events in Washington, D.C. and Los Angeles with high school students listening to creative artists, victim representatives, the Attorney General, and a convicted intellectual property offender, among others, about the harm caused by intellectual property piracy. The events were filmed by Court TV and produced into a 30 minute show aired on cable television. Further, to enhance intellectual property training programs for foreign prosecutors and law enforcement officials, as recommended in the report, Justice worked with the Mexican government to provide a three-day seminar for intellectual property prosecutors and customs officials in December 2004. Such actions are initial efforts to address recommendations that can be further implemented over time. The Department of Homeland Security (DHS) tracks seizures of goods that violate IPR and reports seizures that totaled almost $140 million resulting from over 7,200 seizures in fiscal year 2004. In fiscal year 2004, goods from China (including Hong Kong) accounted for almost 70 percent of the value of all IPR seizures, many of which were shipments of cigarettes and apparel. Other seized goods were shipped from, among other places, Russia and South Africa. A DHS official pointed out that providing protection against IPR-infringing imported goods for some U.S. companies--particularly entertainment companies--can be difficult, because companies often fail to record their trademarks and copyrights with DHS. DHS and Commerce officials told us that they believe this situation could be ameliorated if, contrary to current practice, companies could simultaneously have their trademarks and copyrights recorded with DHS when they are provided their intellectual property right by USPTO or the Copyright Office. To identify shipments of IPR-infringing merchandise and prevent their entry into the United States, DHS is developing an IPR risk-assessment computer model. The model uses weighted criteria to assign risk scores to individual imports. The methodology is based on both historical risk-based trade data and qualitative rankings. The historical data are comprised of seizure information and cargo examination results, while qualitative rankings are based on information such as whether a shipment is arriving from a high-risk country identified by USTR's annual Special 301 report. According to DHS officials, the model has been piloted, and several issues have been identified which must be addressed before it is fully implemented. DHS officials also told us that problems in identifying and seizing IPR- infringing goods frequently arise where the department's in-bond system is involved. The in-bond system allows cargo to be transported from the original U.S. port of arrival (such as Los Angeles) to another U.S. port (such as Cleveland) for formal entry into U.S. commerce or for export to a foreign country. We previously reported that weak internal controls in this system enable cargo to be illegally diverted from the supposed destination. The tracking of in-bond cargo is hindered by a lack of automation for tracking in-bond cargo, inconsistencies in targeting and examining cargo, in-bond practices that allow shipments' destinations to be changed without notifying DHS and extensive time intervals to reach their final destination, and inadequate verification of exports to Mexico. DHS inspectors we spoke with during the course of our previous work cited in-bond cargo as a high-risk category of shipment because it is the least inspected and in-bond shipments have been increasing. We made recommendations to DHS regarding ways to improve monitoring of in- bond cargo. USTR's 2005 Special 301 report identifies customs operations as a growing problem in combating IPR problems in foreign countries such as Ukraine, Canada, Belize, and Thailand. Several interagency mechanisms exist to coordinate overseas law enforcement efforts, intellectual property policy initiatives, and development and assistance activities, although these mechanisms' level of activity and usefulness vary. According to government and industry officials, an interagency trade policy mechanism established by the Congress in 1962 to assist USTR has operated effectively in reviewing IPR issues. The mechanism, which consists of tiers of committees as well as numerous subcommittees, constitutes the principle means for developing and coordinating U.S. government positions on international trade, including IPR. A specialized subcommittee is central to conducting the Special 301 review and determining the results of the review. This interagency process is rigorous and effective, according to U.S. government and industry officials. A Commerce official told us that the Special 301 review is one of the best tools for interagency coordination in the government, while a Copyright Office official noted that coordination during the review is frequent and effective. A representative for copyright industries also told us that the process works well and is a solid interagency effort. NIPLECC, created by the Congress in 1999 to coordinate domestic and international intellectual property law enforcement among U.S. federal and foreign entities, seems to have had little impact. NIPLECC consists of (1) the Under Secretary of Commerce for Intellectual Property and Director of the United States Patent and Trademark Office; (2) the Assistant Attorney General, Criminal Division; (3) the Under Secretary of State for Economic and Agricultural Affairs; (4) the Deputy United States Trade Representative; (5) the Commissioner of Customs; and (6) the Under Secretary of Commerce for International Trade. NIPLECC's authorizing legislation did not include the FBI as a member of NIPLECC, despite its pivotal role in law enforcement. However, according to representatives of the FBI, USPTO, and Justice, the FBI should be a member. USPTO and Justice cochair NIPLECC, which has no staff of its own. In the council's several years of existence, its primary output has been three annual reports to the Congress, which are required by statute. (NIPLECC's 2004 report has been drafted but is not yet available.) According to interviews with industry officials and officials from its member agencies, and as evidenced by its own reports, NIPLECC has struggled to define its purpose and has had little discernable impact. Indeed, officials from more than half of the member agencies offered criticisms of NIPLECC, remarking that it is unfocused, ineffective, and "unwieldy." In official comments to the council's 2003 annual report, major IPR industry associations expressed a sense that NIPLECC is not undertaking any independent activities or effecting any impact. One industry association representative stated that law enforcement needs to be made more central to U.S. IPR efforts and said that although he believes the council was created to deal with this issue, it has "totally failed." The lack of communication regarding enforcement results in part from complications such as concerns regarding the sharing of sensitive law enforcement information and from the different missions of the various agencies involved in intellectual property actions overseas. According to a USTR official, NIPLECC needs to define a clear role in coordinating government policy. A Justice official stressed that, when considering coordination, it is important to avoid creating an additional layer of bureaucracy that may detract from efforts devoted to each agency's primary mission. According to an official from USPTO, NIPLECC has been hampered primarily by its lack of its own staff and funding. In our September 2004 report, we noted that "If the Congress wishes to maintain NIPLECC and take action to increase its effectiveness, the Congress may wish to consider reviewing the council's authority, operating structure, membership, and mission." In the Consolidated Appropriations Act, 2005, the Congress provided $2 million for NIPLECC expenses, to remain available through fiscal year 2006. The act addressed international elements of the council and created the position of the Coordinator for International Intellectual Property Enforcement, appointed by the President, to head NIPLECC. This official may not serve in any other position in the federal government, and the NIPLECC co-chairs, representatives from USPTO and Justice, are to report to the Coordinator. The law also provides additional direction regarding NIPLECC's international mission, providing that NIPLECC shall (1) establish policies, objectives, and priorities concerning international intellectual property protection and intellectual property law enforcement; (2) promulgate a strategy for protecting American intellectual property overseas; and (3) coordinate and oversee implementation of items (1) and (2) by agencies with responsibilities for intellectual property protection and intellectual property law enforcement. The Coordinator, with the advice of NIPLECC members, is to develop a budget proposal for each fiscal year to implement the strategy for protecting American intellectual property overseas and for NIPLECC operations and may select, appoint, employ, and fix compensation of such officers and employees as may be necessary to carry out NIPLECC functions. Personnel from other departments or agencies may be temporarily reassigned to work for NIPLECC. Agency officials told us that, as of June 2005, no Coordinator had been named (although a selection process was underway), the $2 million in NIPLECC funding has not been spent, and NIPLECC continued to accomplish little. In October 2004, USTR and the Departments of Commerce, Justice, and Homeland Security announced STOP! to fight trade in pirated and counterfeit goods. Other STOP! participants are the Department of State and the Department of Health and Human Service's Food and Drug Administration. STOP!, which is targeted at cross-border trade in tangible goods and was initiated to strengthen U.S. government and industry enforcement actions. STOP! has five general objectives: 1. Stop pirated and counterfeit goods at the U.S. border. Such efforts are to be achieved through, for example, the implementation of the DHS IPR risk model, mentioned above, to better identify and seize infringing goods at U.S. borders. 2. Dismantle criminal enterprises that steal intellectual property. Justice and DHS are taking measures to maximize their ability to pursue perpetrators of intellectual property crimes through, for example, the addition of the 5 new Justice CHIP units mentioned above. Justice and DHS are also committed under STOP! to work with the Congress to update IPR legislation. 3. Keep counterfeit and pirated goods out of global supply chains. Commerce is working with industry to develop voluntary guidelines companies can use to ensure that supply and distribution chains are free of counterfeits. 4. Empower U.S. businesses to secure and enforce their rights at home and abroad. For example, Commerce is meeting with small and medium enterprises to inform companies on how to secure and protect their rights in the global marketplace. 5. Reach out to U.S. trading partners to build an international coalition to block trade in pirated and counterfeit goods. USTR and State are engaging in multilateral forums, such as the Organization for Economic Cooperation and Development (OECD) and the Asia- Pacific Economic Cooperation (APEC), through the introduction of new initiatives to improve the global intellectual property environment. Agency officials told us that STOP! has both furthered ongoing agency activities and facilitated new initiatives. For example, Commerce officials told us that while they had been working on having the OECD conduct a study of the extent and impact of counterfeiting and piracy, STOP! provided additional momentum to succeed in their efforts. They said that the OECD has now agreed to conduct a comprehensive study on the extent and effect of international counterfeiting and piracy in tangible goods, with a study addressing the digital arena to follow. In addition, in March 2005, Justice announced the continuation of work by its intellectual property task force, which had been rolled into STOP!. Regarding new initiatives, USPTO has established a hotline for companies to obtain information on intellectual property rights enforcement and report problems in other countries. According to USPTO, this hotline has received 387 calls since it was activated in October 2004. Commerce has also developed a website to provide information and guidance to IPR holders for registering and protecting their intellectual property rights in other countries. The most visible new effort undertaken as a part of STOP! is a coordinated U.S. government outreach to foreign governments. In April 2005 officials from seven federal agencies traveled to Hong Kong, Japan, Korea, and Singapore and in June, they traveled to Belgium, France, Germany, and the United Kingdom. According to USTR officials, the goals of these trips are to describe U.S. initiatives related to IPR enforcement and to learn from the activities of "like-minded" trading partners with IPR concerns and enforcement capacities similar to the United States. DHS officials reported that their Asian counterparts were interested in the U.S. development of the IPR risk model to target high-risk imports for inspection, while a USTR official emphasized that U.S. participants were impressed by a public awareness campaign implemented in Hong Kong. Officials involved in STOP! told us that one key goal of the initiative is to improve interagency coordination. Agency officials told us that to achieve this goal, staff-level meetings have been held monthly and senior officials have met about every 6 weeks. Agency officials also told us that as an Administration initiative with high-level political support, STOP! has energized agencies' enforcement efforts and strengthened interagency efforts. A USPTO official explained that STOP! has laid the groundwork for future progress and continued interagency collaboration. Agency officials noted that STOP! goals and membership overlap with those of NIPLECC, and remarked that STOP! could possibly be integrated into NIPLECC at some future date. In May 2005, a NIPLECC meeting was held to address coordination between STOP! and NIPLECC. According to a Justice official, once an International Intellectual Property Enforcement Coordinator is appointed, there may be an opportunity to continue the momentum that STOP! has provided in the context of NIPLECC activities. One private sector representative we met with said that although U.S. industry has worked closely with agencies to achieve the goals of STOP!, he is frustrated with the lack of clear progress in many areas. For instance, he said that the administration has neither supported any pending legislation to improve intellectual property rights protection, nor proposed such legislation. He added that agencies need to do more to integrate their systems, noting the situation where companies must currently receive a trademark or copyright from USPTO or the Copyright Office, and then separately record that right with DHS. Another industry representative noted that STOP! has been announced with great fanfare, but that progress has been sparse. However, he noted that industry supports this administration effort and is working collaboratively with the federal agencies to improve IPR protection. Another industry official cited issues of concern such as insufficient enforcement resources "on the ground" (particularly at DHS). Other coordination mechanisms include the National International Property Rights Coordination Center (IPR Center) and informal coordination. The IPR Center in Washington, D.C., a joint effort between DHS and the FBI, began limited operations in 2000. According to a DHS official, the potential for coordination between DHS, the FBI, and industry and trade associations makes the IPR Center unique. The IPR Center is intended to serve as a focal point for the collection of intelligence involving copyright and trademark infringement, signal theft, and theft of trade secrets. However, the center is not widely used by industry. For example, an FBI official told us that from January 2004 through May 2005, the FBI has received only 10 referrals to its field offices from the IPR Center. Further, the number of FBI and DHS staff on board at the center has decreased recently and currently stands at 10 employees (down from 20 in July 2004), with no FBI agents currently working there and fewer DHS agents than authorized. However, IPR Center officials emphasized one recent, important case that was initiated by the center. DHS, in conjunction with the Chinese government and with the assistance of the intellectual property industry, conducted the first ever joint U.S.-Chinese enforcement action on the Chinese mainland, disrupting a network that distributed counterfeit motion pictures worldwide. More than 210,000 counterfeit motion picture DVDs were seized, and in 2005, four individuals (two Chinese and two Americans) were convicted in China. Policy agency officials noted the importance of informal but regular communication among staff at the various agencies involved in the promotion or protection of intellectual property overseas. Several officials at various policy-oriented agencies, such as USTR and the Department of Commerce, noted that the intellectual property community was small and that all involved were very familiar with the relevant policy officials at other agencies in Washington, D.C. Further, State Department officials at U.S. embassies regularly communicate with agencies in Washington, D.C., regarding IPR matters and U.S. government actions. Agency officials noted that this type of coordination is central to pursuing U.S. intellectual property goals overseas. Although communication between policy and law enforcement agencies can occur through forums such as the NIPLECC, these agencies do not systematically share specific information about law enforcement activities. According to an FBI official, once a criminal investigation begins, case information stays within the law enforcement agencies and is not shared. A Justice official emphasized that criminal law enforcement is fundamentally different from the activities of policy agencies and that restrictions exist on Justice's ability to share investigative information, even with other U.S. agencies. U.S. efforts such as the annual Special 301 review have contributed to strengthened foreign IPR laws, but enforcement overseas remains weak. The impact of U.S. activities is challenged by numerous factors. Industry representatives report that the situation may be worsening overall for some intellectual property sectors. The efforts of U.S. agencies have contributed to the establishment of strengthened intellectual property legislation in many foreign countries, however, the enforcement of intellectual property rights remains weak in many countries, and U.S. government and industry sources note that improving enforcement overseas is now a key priority. A recent USTR Special 301 report states that "although several countries have taken positive steps to improve their IPR regimes, the lack of IPR protection and enforcement continues to be a global problem." For example, although the Chinese government has improved its statutory IPR regime, USTR remains concerned about enforcement in that country. According to USTR, counterfeiting and piracy remain rampant in China and increasing amounts of counterfeit and pirated products are being exported from China. In addition, although Ukraine has shut down offending domestic optical media production facilities, pirated products continue to pervade Ukraine, and, according to USTR's 2004 Special 301 Report, Ukraine is also a major trans-shipment point and storage location for illegal optical media produced in Russia and elsewhere as a result of weak border enforcement efforts. Although U.S. law enforcement does undertake international cooperative activities to enforce intellectual property rights overseas, executing these efforts can prove difficult. For example, according to DHS and Justice officials, U.S. efforts to investigate IPR violations overseas are complicated by a lack of jurisdiction as well as by the fact that U.S. officials must convince foreign officials to take action. Further, a DHS official noted that in some cases, activities defined as criminal in the United States are not viewed as an infringement by other countries and that U.S. law enforcement agencies can therefore do nothing. In addition, U.S. efforts confront numerous challenges. Because intellectual property protection is one of many U.S. government objectives pursued overseas, it is viewed internally in the context of broader U.S. foreign policy objectives that may receive higher priority at certain times in certain countries. Industry officials with whom we met noted, for example, their belief that policy priorities related to national security were limiting the extent to which the United States undertook activities or applied diplomatic pressure related to IPR issues in some countries. Further, the impact of U.S. activities is affected by a country's own domestic policy objectives and economic interests, which may complement or conflict with U.S. objectives. U.S. efforts are more likely to be effective in encouraging government action or achieving impact in a foreign country where support for intellectual property protection exists. It is difficult for the U.S. government to achieve impact in locations where foreign governments lack the "political will" to enact IPR protections. Many economic factors complicate and challenge U.S. and foreign governments' efforts, even in countries with the political will to protect intellectual property. These factors include low barriers to entering the counterfeiting and piracy business and potentially high profits for producers. In addition, the low prices of counterfeit products are attractive to consumers. The economic incentives can be especially acute in countries where people have limited income. Technological advances allowing for high-quality inexpensive and accessible reproduction and distribution in some industries have exacerbated the problem. Moreover, many government and industry officials believe that the chances of getting caught for counterfeiting and piracy, as well as the penalties when caught, are too low. The increasing involvement of organized crime in the production and distribution of pirated products further complicates enforcement efforts. Federal and foreign law enforcement officials have linked intellectual property crime to national and transnational organized criminal operations. Further, like other criminals, terrorists can trade any commodity in an illegal fashion, as evidenced by their reported involvement in trading a variety of counterfeit and other goods. Many of these challenges are evident in the optical media industry, which includes music, movies, software, and games. Even in countries where interests exist to protect domestic industries, such as the domestic music industry in Brazil or the domestic movie industry in China, economic and law enforcement challenges can be difficult to overcome. For example, the cost of reproduction technology and copying digital media is low, making piracy an attractive employment opportunity, especially in a country where formal employment is hard to obtain. The huge price differentials between pirated CDs and legitimate copies also create incentives on the consumer side. For example, when we visited a market in Brazil, we observed that the price for a legitimate DVD was approximately ten times the price for a pirated DVD. Even if consumers are willing to pay extra to purchase the legitimate product, they may not do so if the price differences are too great for similar products. Further, the potentially high profit makes optical media piracy an attractive venture for organized criminal groups. Industry and government officials have noted criminal involvement in optical media piracy and the resulting law enforcement challenges. Recent technological advances have also exacerbated optical media piracy. The mobility of the equipment makes it easy to transport it to another location, further complicating enforcement efforts. Likewise, the Internet provides a means to transmit and sell illegal software or music on a global scale. According to an industry representative, the ability of Internet pirates to hide their identities or operate from remote jurisdictions often makes it difficult for IPR holders to find them and hold them accountable. Despite improvements such as strengthened foreign IPR legislation, international IPR protection may be worsening overall for some intellectual property sectors. For example, according to copyright industry estimates, losses due to piracy grew markedly in recent years. The entertainment and business software sectors, for example, which are very supportive of USTR and other agencies, face an environment in which their optical media products are increasingly easy to reproduce, and digitized products can be distributed around the world quickly and easily via the Internet. According to an intellectual property association representative, counterfeiting trademarks has also become more pervasive in recent years. Counterfeiting affects more than just luxury goods; it also affects various industrial goods. An industry representative noted that U.S. manufacturers of all sizes are now being adversely affected by counterfeit imports. An industry representative also added that there is a need for additional enforcement activity by the U.S. government at the border. However, he recognized that limited resources and other significant priorities for DHS heighten the need to use existing resources more effectively to interdict more counterfeit and pirated goods. The U.S. government has demonstrated a commitment to addressing IPR issues in foreign countries using multiple agencies. However, law enforcement actions are more restricted than other U.S. activities, owing to factors such as a lack of jurisdiction overseas to enforce U.S. law. Several IPR coordination mechanisms exist, with the interagency coordination that occurs during the Special 301 process standing out as the most significant and active. Efforts under STOP! appear to have strengthened the U.S. government's focus on addressing IPR enforcement problems in a more coordinated manner. Conversely, NIPLECC, the mechanism for coordinating intellectual property law enforcement, has accomplished little that is concrete and its ineffectiveness continues despite recent congressional action to provide funding, staffing, and clearer guidance regarding its international objectives. In addition, NIPLECC does not include the FBI, a primary law enforcement agency. Members, including NIPLECC leadership, have repeatedly acknowledged that the group continues to struggle to find an appropriate mission. Mr. Chairman, this concludes my prepared statement. I would be pleased to respond to any questions that you or other members of the subcommittee may have at this time. Should you have any questions about this testimony, please contact me by e-mail at [email protected]. I can also be reached at (202) 512-4128. Other major contributors to this testimony were Emil Friberg, Leslie Holen, Jason Bair, Ming Chen, Sharla Draemel, and Reid Lowe. 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.

Although the U.S. government provides broad protection for intellectual property domestically, intellectual property protection in parts of the world is inadequate. As a result, U.S. goods are subject to piracy and counterfeiting in many countries. A number of U.S. agencies are engaged in efforts to improve protection of U.S. intellectual property abroad. This testimony, based on a prior GAO report as well as recent work, describes U.S. agencies' efforts, the mechanisms used to coordinate these efforts, and the impact of these efforts and the challenges they face. U.S. agencies undertake policy initiatives, training and assistance activities, and law enforcement actions in an effort to improve protection of U.S. intellectual property abroad. Policy initiatives include identifying countries with the most significant problems--an annual interagency process known as the "Special 301" review. In addition, many agencies engage in assistance activities, such as providing training for foreign officials. Finally, a small number of agencies carry out law enforcement actions, such as criminal investigations and seizures of counterfeit merchandise. Agencies use several mechanisms to coordinate their efforts, although the mechanisms' usefulness varies. The National Intellectual Property Law Enforcement Coordination Council, established in 1999 to coordinate domestic and international intellectual property law enforcement, has struggled to find a clear mission, has undertaken few activities, and is generally viewed as having little impact despite recent congressional action to strengthen the council. The Congress's action included establishing the role of Coordinator, but the position has not yet been filled (although the selection process is underway). The Administration's October 2004 Strategy Targeting Organized Piracy (STOP!) is intended to strengthen U.S. efforts to combat piracy and counterfeiting. Thus far, the initiative has resulted in some new actions and emphasized other ongoing efforts. U.S. efforts have contributed to strengthened intellectual property legislation overseas, but enforcement in many countries remains weak, and further U.S. efforts face significant challenges. For example, competing U.S. policy objectives such as national security interests take precedence over protecting intellectual property in certain regions. Further, other countries' domestic policy objectives can affect their "political will" to address U.S. concerns. Finally, many economic factors, as well as the involvement of organized crime, hinder U.S. and foreign governments' efforts to protect U.S. intellectual property abroad.

As of January 1, 2000, all federal agencies covered by EEOC regulations were required to establish or make available an ADR program for both the informal and formal complaint stages of the EEO process. On March 9, 2000, at a joint hearing held by the Subcommittee on Civil Service of the House Committee on Government Reform and the Subcommittee on Military Readiness of the House Armed Services Committee, the Navy discussed the results of its experiences under its 18- month pilot program for resolving EEO complaints through the use of ADR, which resulted in resolution on an average of 31 days. The Floyd D. Spence National Defense Authorization Act, for fiscal year 2001, authorized the Secretary of Defense to carry out at least three pilot programs--one at a military department and two at DOD agencies. The programs were authorized to operate for 3 years. The act exempts the programs from EEOC's procedural requirements or restrictions. In 2004, DOD authorized the following as pilot programs: (1) DLA, which provides worldwide logistics support--munitions and supplies--for the missions of military departments; (2) DeCA, which operates a worldwide chain of commissaries providing groceries to military personnel, retirees, and their families at a discount; and (3) 31 bases of the USAF, accounting for about one-third of USAF bases with federal EEO programs. The pilot programs were authorized by the Secretary for 2 years with an option for an additional (third) year. The legislative objectives for the programs are to: reinforce local management and chain of command accountability, and provide the parties involved with early opportunity for resolution. The legislation also provides that pilot program participants voluntarily participate in the pilot program, and that participants maintain their right to appeal final agency decisions to EEOC and file suit in federal district court as is the case in the federal EEO complaint process. The Office of the Deputy Undersecretary of Defense for Civilian Personnel Policy, the Office of the Deputy Undersecretary for Equal Opportunity, and the Office of Complaint Investigations within the Civilian Personnel Management Service have ongoing responsibility for oversight, monitoring, and evaluation of the overall pilot program. Under EEOC regulations, during the informal, or precomplaint counseling stage, ADR techniques can be used. Counselors are to advise individuals that, when the agency agrees to offer ADR in the particular case, they may choose to participate in either counseling or in ADR. If the matter is not resolved by counseling or if ADR is unsuccessful, the counselor is required to inform the employee in writing of his or her right to file a formal discrimination complaint with the agency. ADR can also be used after an agency receives a formal complaint. After a complainant files a formal discrimination complaint, the agency must decide whether to accept or dismiss the complaint and notify the complainant. If the agency dismisses the complaint, the complainant can appeal the dismissal to EEOC. If the agency accepts the complaint, it has 180 days to investigate the accepted complaint and provide the complainant with a copy of the investigative file. Within 30 days of receipt of the copy of the investigative file, the complainant must choose between requesting (1) a hearing and decision from an EEOC administrative judge (AJ) or (2) a final decision from the agency. When a hearing is not requested, the agency issues a final decision. A complainant may appeal an agency's final decision to EEOC. In cases where a hearing is requested, the AJ has 180 days to issue a decision and send the decision to the complainant and the agency. If the AJ issues a finding of discrimination, he or she is to order appropriate relief. After the AJ decision is issued, the agency can issue a final order notifying the complainant whether or not the agency will fully implement the decision of the AJ, and the employee can file an appeal with EEOC. If the agency issues an order notifying the complainant that the agency will not fully implement the decision of the AJ, the agency also must file an appeal with EEOC at the same time. See appendix I for more details and associated time frames related to the EEO complaint process. Although features of the three programs vary by agency and focus on different stages of the complaint process, they all emphasize the use of ADR techniques available under the current federal EEO process. They also share common implementation strategies, including outreach to eligible staff to inform them about the programs, staff training, and electronic data collection. In its 9-month evaluation, DOD observed that pilot program activity had been lower than anticipated; DOD did not provide a baseline for its comparison or elaborate on the reason for this occurrence. After 12 months, program officials continue to report low case activity. In developing the overall EEO pilot program, DOD allowed DLA, DeCA, and USAF to determine their individual program design. However, in its memo soliciting pilot program proposals, DOD encouraged potential participants to work with the Office of Complaint Investigations to develop the format and content of their proposals, offering the assistance of the Office's experienced staff of certified complaint investigators and mediators with success in using ADR techniques. Two of the programs-- DLA and DeCA--emphasize the use of ADR in the informal stage, consistent with federal EEO regulations. Program officials said that their programs are attempting to address the legislative objective of providing early opportunity for resolution by focusing on ADR. The third program, in selected bases of the USAF, changes the formal stage of the federal EEO process by combining the investigative and hearing phases after a complainant has filed a formal complaint. This program also emphasizes the use of ADR techniques both during the informal stage as well as at the time a complainant files a formal complaint. DLA's program, Pilot for Expedited Complaint Processing (PECP), began in October 2004 at DLA headquarters in Fort Belvoir, Va. DLA considers several types of cases, such as those that challenge government policy, inappropriate for PECP and screens them out. The PECP process is similar to the informal stage of the current EEO process. DLA officials said the PECP process has three steps. The first step occurs when an employee who believes he or she has been discriminated against makes initial contact with DLA's EEO office. An EEO Intake Specialist collects specific information about the employee's concerns and drafts an intake report, which includes a description and basis of the claim. The EEO Intake Specialist advises the employee orally and in writing about (1) PECP and how it compares to the federal counseling process and (2) the employee's right to opt out of the pilot program at any time before the filing of a formal complaint. The second step begins when the employee chooses to participate in PECP. At this time, the EEO Intake Specialist discusses and offers the employee ADR. The EEO Intake Specialist also informs the employee that participating in ADR is optional and can be used at any stage of the complaint process. The EEO Intake Specialist considers two methods of ADR-- mediation or facilitation. Mediation is the primary method used by PECP. According to DLA, the method of ADR used is based on the employee's claim and the EEO Intake Specialist's assessment of the method that would more likely encourage communication between the employee and management and resulting resolution. Under the third step, ADR takes place. DLA pilot program officials acknowledged that the pilot program's ADR features do not differ from those offered under the current EEO process. DLA has an ADR program called Reach Equitable Solutions Voluntarily and Easily (RESOLVE), which is used when mediation is offered. RESOLVE is managed by DLA's General Counsel. According to DLA officials, RESOLVE mediators cannot mediate precomplaints or complaints involving organizations they may service in another capacity, thus ensuring the neutrality of the mediator. DeCA's program, Early Resolution Opportunity (ERO), began in February 2005 and covers 23 stores in three zones (DeCA West Zone 16-San Diego, Calif.; DeCA East Zone 28-Virginia Beach, Va; and DeCA East Zone 6-San Antonio, Tex.). Using ADR techniques, ERO seeks to provide early resolution opportunities, because according to DeCA, ineffective communication between employees and supervisors or managers often results in perceptions of discrimination. Moreover, DeCA believes that disputes can be resolved before they enter the informal counseling stage if a trained EEO facilitator can intervene to negotiate resolution. Cases that involve alleged violent acts, theft, sexual harassment, termination, or may be precedent setting, are ineligible for ERO. ERO is divided into two steps. In the first step, a trained DeCA facilitator attempts to resolve a claim before the start of the informal stage of the current process. Employees at stores participating in ERO can call a toll- free number to discuss their concerns with a trained facilitator. For example, an employee could call about perceived discrimination over schedule changes, and the facilitator may discuss what had occurred and rationale for schedule changes (e.g., to cover absences). According to DeCA officials, some employees "self screen" during the facilitation process, deciding not to pursue an EEO complaint or to pursue another avenue, such as the negotiated grievance process. The second step of ERO, which follows if facilitation is unsuccessful in resolving the employee's concerns, involves calling in a third-party mediator. According to a DeCA official, DeCA uses mediators from DOD's Office of Complaint Investigations, because they are trained, experienced ADR professionals, and have a greater perception of neutrality as they do not work for DeCA. If mediation fails, an individual may choose to file a formal complaint. According to a DeCA official, ERO seeks to reduce the processing time of the formal stage. To help achieve this goal, DeCA reduces processing times for two phases of the formal stage of the complaint process: (1) after a complainant files a formal complaint, DeCA has set a goal in ERO of 14 days to accept, partially accept, or dismiss it; and (2) after the report of investigation is completed, DeCA sends a notice informing the complainant that he or she has 7 days to either request a hearing or a final agency decision, reducing the time from 30 days under EEOC regulations. In addition, to further reduce processing time for ERO cases, paper documents are replaced with electronic files. Finally, according to a DeCA official, officials from DeCA and the Office of Complaint Investigations can download relevant case documents from a secure shared drive for complaints filed under both ERO and under the current EEO process. USAF's program, called Compressed Orderly Rapid Equitable (CORE), focuses on the formal phase of the EEO complaint process. The program began January 1, 2005, at 29 continental U.S. sites and 2 overseas offices that we refer to as test bases. Although the 31 test bases account for less than one-third of all USAF bases with EEO programs, they produce over 80 percent of all USAF EEO complaints. Cases that involve class and mixed- case complaints or cases related to claims already accepted under the current federal EEO complaint process are not eligible to participate in CORE. CORE has a two-step process that begins at the time the complainant files a formal complaint. Until a complaint is filed, USAF officials attempt early resolution of allegations of discrimination in the informal stage using the current federal EEO process. If resolution is not achieved during this stage, the complainant must choose between CORE and the current federal EEO process. The first step of CORE involves mediation. If the complainant declines mediation or mediation is unsuccessful, step two begins, and a CORE Fact-Finding Conference is conducted. USAF defines this conference as a "non-adversarial, impartial fact-gathering procedure." The conference is conducted by a CORE fact-finder, provided by the Office of Complaint Investigations. During the conference, the fact-finder hears testimony from witnesses and receives documentary evidence; also at this time, a verbatim transcript is taken by a certified court reporter. Following the conference, the fact-finder completes the record of the complaint and recommends a decision in the case to the director of the USAF Civilian Appellate Review Office. The director of the USAF Civilian Appellate Review Office may accept, reject, or modify the fact-finder's recommended decision. The director then prepares a final agency decision for signature by the director of USAF Review Boards Agency. The director of USAF Review Boards Agency issues the final agency decision. Any further action on the complaint, including rights to appeal to EEOC and file a lawsuit, are governed by current federal EEO complaint procedures. According to USAF, by combining the investigative and hearing phases of the current federal EEO complaint process, USAF aims to issue a final agency decision within 127 days or less of filing the formal complaint; the current process can take up to 360 days plus another 70 days to provide the complainant and the agency their allotted time for decision making. USAF officials also indicated that through the CORE Fact-Finding Conference, each complainant gets their "day in court," whereas under the current EEO process, complainants often wait months to request a hearing and can have their complaint dismissed by an EEOC AJ without a hearing. The three programs share common implementation strategies but implement them differently. In our review of the programs and subsequent discussions with DOD and program officials, DeCA and USAF conducted some level of outreach to program-eligible employees to inform them about the programs. For example, DeCA officials went to participating stores and handed out brochures describing ERO. According to USAF program officials, outreach on CORE included sending a letter to all participating bases from the Chief of Staff for Personnel as well as a notice to the unions. Additionally, CORE was publicized in USAF news service and governmentwide media. We also found that agencies varied in how they trained their EEO employees about the programs. USAF officials used contractors to train some employees in CORE over a 1-week period; in turn, those employees trained others. DLA officials had informal in-house employee training. DeCA sent EEO officials and an attorney from its headquarters trained in ERO to each of its three zones to train EEO managers as well as managers and supervisors at its 23 stores. Finally, all three programs used electronic data collection for tracking and monitoring, with each program developing its own electronic data collection method. For example, USAF uses EEO-Net system and software to collect program data. USAF also uses USAF-specific software, the Case Management and Tracking System, to manage the EEO process, including CORE, and an electronic case identifier to mark CORE cases to help in monitoring those program cases that reach EEOC on appeal. DeCA currently uses an Access database to track ERO activity, and DLA uses an Excel spreadsheet to track PECP activity. Officials from both the programs and DOD's EEO pilot program oversight entities have indicated their willingness to share information. As we have previously reported, by assessing their relative strengths and limitations through collaboration, agencies can look for opportunities to address resource needs by leveraging each others' resources and obtaining additional benefits that would not be available if they were working separately. While the focus of our earlier work was on coordination between agencies from different departments, the findings would also be applicable to agencies within a department that are engaged in similar activities. In its 9-month evaluation report, DOD stated that program activity for all three programs had been lower than anticipated. At the end of the first year, program officials reported continued low program activity. However, in its report, DOD did not provide a baseline for its comparison or elaborate on the reason for this occurrence. Instead, DOD's evaluation plan states that data collected during the pilot program are to be measured against fiscal year 2004 baseline data. Therefore, we are including fiscal year 2004 data as reported to EEOC for each program for comparison purposes. Since many cases are still going through the program process, for comparison, we report only the number of initial contacts or formal complaints. According to DeCA officials, from January 1, 2005, through January 31, 2006, 42 employees contacted DeCA's EEO office; of those, 41 were offered participation in ERO, and all opted for ERO. Of those who completed ERO, 16 did so with resolution; 9 did so without resolution, and 14 are still in process. Data are not available for DeCA test stores for fiscal year 2004, the year before ERO was implemented. According to DLA officials, from January 1, 2005, through January 31, 2006, 15 employees contacted DLA's EEO office; of those, 13 were offered participation in PECP, and 12 opted for it. Of those who completed PECP, 10 did so with resolution; 1 declined participation, and 1 withdrew the precomplaint; 1 opted out of PECP. For fiscal year 2004, the year before DLA implemented PECP, 26 employees contacted DLA's headquarters EEO office. According to USAF officials, from January 1, 2005, through January 31, 2006, a total of 634 formal complaints were filed USAF-wide. The CORE process was available to 534 of the complainants. Of those complainants offered CORE, 104 opted to process their complaint using CORE. Of these 104, 63 have been closed with resolution, and 28 CORE cases are still in progress. Thirteen complainants opted out of CORE and chose to return to the current EEO process. For fiscal year 2004, the year before USAF implemented CORE, 667 formal complaints were filed USAF-wide; of these, 488 were filed at what are now CORE test sites. DOD's 9-month report stated that case activity was lower than expected. As a result of the low case activity, program officials have said they will seek to extend their respective programs for an additional (third) year. According to the authorizing memo from DOD implementing the pilot program, in April 2006 program officials can request to extend the pilot program for a third year. At the time of this report, DeCA and USAF had made requests of DOD to extend the operation of their pilot programs for a third year. Our initial assessment of DOD's evaluation plan for the pilot program found both strengths and limitations. One strength of the plan was the inclusion of forms for collecting baseline data (before the programs began) and pilot program data, which provides a tool for the pilot programs to measure some aspects of their progress. Although DOD developed an evaluation plan for the overall pilot program, the plan lacked some key features of a sound evaluation plan, including measures that are directly linked to the program objectives, criteria for determining pilot program performance, and an appropriate data analysis plan for the evaluation design. Without such features, DOD will be limited in its ability to conduct an accurate and reliable assessment of the programs' results. In addition, the lack of established key evaluation features in DOD's plan increases the likelihood of insufficient or unreliable data, further limiting confidence in pilot program results. Without confidence in pilot program results, DOD will be limited in its decision making regarding this pilot program, and Congress will be limited in its decision making about the pilot program's potential broader application. Officials from DOD's pilot program oversight entities have acknowledged shortcomings and have indicated a willingness to modify the plan. Considering the evaluation plan itself and interviews with DOD officials, we found that DOD's plans for assessing the pilot programs had some strengths, including: Forms in the evaluation plan for collecting baseline data (before the pilot programs began) and pilot program data. According to the evaluation plan, baseline data from fiscal year 2004 are recorded on a template (i.e., a modified version of EEOC Form 462) appropriate to the part of the complaint process the pilot program focuses on. Data collected during the programs will be measured against the baseline data collected in the prior year's EEOC Form 462. Pilot program and nonpilot program data are to be collected by an Individual Data Report form, which is to collect processing-time data, comparative information on early ADR, and early management involvement in cases at each pilot program site. Comparing data from the modified EEOC Form 462 to data from the program as well as to nonprogram cases is expected to help DOD determine whether processing times and redundancy were reduced concerning early resolution and streamlining as a result of the pilot program. Detailed time frames, roles and responsibilities, and report planning in the evaluation plan. The evaluation plan includes a schedule that details tasks, roles and responsibilities, and milestones for completing set tasks in evaluating the pilot program. This schedule provides a framework that is organized and easy to follow. Inclusion of reasonable research design. The evaluation plan includes a reasonable method for assessing pilot program results. Because the pilot program legislation mandates voluntary participation in the program, DOD was restricted from one form of design (i.e., randomly assigning employees alleging or filing complaints of discrimination to participate in the pilot program). As a result, DOD chose to compare prepilot and postpilot program data as well as pilot and nonpilot program cases. In addition, DOD officials said that the plan can be adjusted to the extent feasible to ensure that the data collected are sufficient for evaluating the pilot program. DOD's plan for evaluating the effectiveness of the pilot program lacks some key features that are essential to assessing performance. Well-developed evaluation plans, which include key evaluation features, have a number of benefits, perhaps most importantly, increasing the likelihood that evaluations will yield methodologically sound results, thereby supporting effective program and policy decisions. The lack of established key evaluation features in DOD's plan increases the likelihood of insufficient or unreliable data, limiting confidence in pilot program results. Without confidence in pilot program results, DOD will be limited in its decision making regarding this pilot program, and Congress will be limited in its decision making about the pilot program's potential broader application. Some key features of a sound evaluation plan include: well-defined, clear, and measurable objectives; measures that are directly linked to the program objectives; criteria for determining pilot program performance; a way to isolate the effects of the pilot programs; a data analysis plan for the evaluation design; and a detailed plan to ensure that data collection, entry, and storage are reliable and error-free. DOD's evaluation plan contains the following limitations: The objectives in DOD's evaluation plan are not well defined or clear, which makes measurement problematic. For example, the evaluation plan identifies management accountability as an objective without defining it, who it applies to, and how it will be measured. Without well- defined, clear, and measurable objectives, the appropriate data may not be collected, thus hindering the assessment of pilot program progress. DOD's data collection efforts are not linked to objectives in the evaluation plan. For example, the evaluation plan contains a variety of surveys that the individual pilot programs can use to measure customer satisfaction, but customer satisfaction is not included in the evaluation plan as an objective of the plan. Directly linking objectives and measures is a key feature of an evaluation plan. Without such linkage, data collection efforts may not directly inform stated objectives, and in turn, may not inform the evaluation effort. DOD's evaluation plan does not establish standards for evaluating pilot program performance. For example, DOD's plan does not state the amount or type of change required to indicate that a pilot program has succeeded in reducing processing time. Without targets or standards for determining success, it will be difficult to determine if the pilot program was effective. DOD's evaluation plan does not mention controlling for possible outcomes that are attributable to factors other than the effects of the programs. A preferred research method is to use random assignment of program participants to provide greater confidence that results are attributable to a program. As we mentioned, DOD was restricted from randomly assigning employees alleging or filing complaints of discrimination to participate in the pilot program. As a result, other factors, such as the type of complaint, complainant, or the mediator may affect pilot program outcomes. Establishing controls for such factors could help isolate the effects attributable to the pilot programs. When an evaluation design involves, for example, a comparison between prepilot and postpilot program conditions, the research design should include controls to ensure that results will be attributable to the pilot program and not to other factors. DOD's evaluation plan does not explain how the data will be analyzed. Although the evaluation plan has templates for collecting data, including pilot program baseline data, individual data reports, and various surveys, it does not state how the data collected will be analyzed. A data analysis plan is a key feature of an evaluation plan as it sets out how data will be analyzed to determine if program objectives have been met. Without a data analysis plan, it is not clear how the data will be analyzed to inform the objectives of the evaluation and assess the performance of the programs. DOD's plan does not explain how the integrity of the data collected will be ensured. A detailed plan to ensure that data collection, entry, and storage are reliable and error-free is a key feature of an evaluation plan that gives greater confidence to data quality and reliability and to any findings made from these data. Without a detailed plan to ensure that data collection, entry, and storage are reliable and error-free, confidence in pilot program results will be limited. All three programs share a common feature of emphasizing the use of ADR to meet the legislative mandate to improve the efficiency of the EEO complaint process. In addition, although authorized to operate outside of current EEOC regulations, to a large extent, two of the three programs have been designed by DOD to operate within the requirements of current regulations. While sharing common strategies in such areas as electronic data collection, the pilot programs implemented them differently. As the challenges of the 21st century grow, it will become increasingly important for DOD to consider how it can maximize performance and results through the improved collaboration of its organizations. Officials from the programs and DOD's EEO pilot program oversight entities have indicated their willingness to share information and strategies. To better ensure that it will provide useful results, DOD needs to make changes to its evaluation plan. Although DOD's evaluation plan had some strengths, the plan's shortcomings may impede DOD's ability to produce sound results that can inform both program and policy decisions regarding the overall pilot program. The lack of key evaluation features, such as clear and measurable objectives, measures linked to these objectives, and established criteria for determining pilot program performance may limit confidence in pilot program results. To improve the performance and results of the pilot program, we recommend that the Secretary of Defense direct the Deputy Undersecretary of Defense for Civilian Personnel Policy, the Deputy Undersecretary for Equal Opportunity, and the Civilian Personnel Management Service to take the following actions: Establish regular intra-agency exchanges of information on outreach strategies, training, and electronic data collection from which the pilot programs could achieve potential benefits that would not be available if working separately. Develop a sound evaluation plan to accurately and reliably assess the pilot programs' results, including such key features as well-defined, clear, and measurable objectives; measures that are directly linked to the program objectives; criteria for determining pilot program performance; a way to isolate the effects of the pilot programs; a data analysis plan for the evaluation design; and a detailed plan to ensure that data collection, entry, and storage are reliable and error-free. We provided a draft of this report to the Secretary of Defense for his review and comment. The Principal Deputy Undersecretary of Defense provided written comments, which are included in appendix II. DOD generally agreed with our recommendations. Regarding the establishment of regular intra-agency exchanges of information among the pilot programs to leverage potential benefits, DOD stated that it will hold quarterly meetings with pilot program managers. Concerning the development of an evaluation plan that accurately and reliably assesses the pilot programs' results, DOD partially concurred with the recommendation and stated that it would consider and incorporate the recommended key features into the evaluation plan as appropriate. However, DOD also stated that the purpose of the plan was to assist pilot program evaluators in their work by specifying those procedures, tools, and objectives that would be unique to the pilot programs. In its comments, DOD reasons that because all pilot program officials agreed on a particular objective, which was common to both the pilot and traditional EEO complaint procedures, that it was not necessary to link data collection efforts to that objective or incorporate either the objective or the data collection effort in the evaluation plan. Because the plan is the long-term guide for the pilot program evaluation process and because staff changes occur, it is important that DOD include all objectives and methods they intend to use in the plan, allowing the evaluation process to be more transparent and provide clearer guidance to the pilot program officials on evaluation procedures. In its response, DOD also commented on our observation that to a large extent two of the three pilot programs were designed and are operating within existing EEOC requirements. DOD noted that this was due in large part to a presidential memorandum issued when the legislation was signed. The memorandum, which addressed the implementation of the pilot program, required that a complaining party be allowed to opt out of the pilot program at any time. According to DOD, adhering to this requirement necessitated using a similar design to the current EEO process so that complaining parties who decided to opt out would not be penalized by having to start at the very beginning of the current EEO complaint process. It is not clear to us that ensuring the ability to opt out at any point necessitates returning the complaining party to the very beginning of the current EEO process in all cases. Rather, the complaining party would be returned to the current EEO process at an appropriate point based on what was achieved through the pilot program process. Overall, we see nothing in the presidential memorandum that would limit DOD's legitimate use of the procedural flexibility granted by Congress through the pilot program authority. We will send copies of this report to other interested congressional parties, the Secretary of Defense, and the Chair of EEOC. We also will make copies available to others upon request. In addition, the report is available on GAO's home page at http://www.gao.gov. If your staff have questions about this report, please contact me on (202) 512-9490. Key contributors to this report are listed in appendix III. Title VII of the Civil Rights Act of 1964, as amended, makes it illegal for employers, including federal agencies, to discriminate against their employees or job applicants on the basis of race, color, religion, sex, or national origin. The Equal Pay Act of 1963 protects men and women who perform substantially equal work in the same establishment from sex- based wage discrimination. The Age Discrimination in Employment Act of 1967, as amended, prohibits employment discrimination against individuals who are 40 years of age or older. Sections 501 and 505 of the Rehabilitation Act of 1973, as amended, prohibit discrimination against qualified individuals with disabilities who work or apply to work in the federal government. Federal agencies are required to provide reasonable accommodation to qualified employees or applicants for employment with disabilities, except when such accommodation would cause an undue hardship. In addition, a person who files a complaint or participates in an investigation of an equal employment opportunity (EEO) complaint or who opposes an employment practice made illegal under any of the antidiscrimination statutes is protected from retaliation. The Equal Employment Opportunity Commission (EEOC) is responsible for enforcing all of these laws. Federal employees or applicants for employment who believe that they have been discriminated against by a federal agency may file a complaint with that agency. The EEOC has established regulations providing for the processing of federal sector employment discrimination complaints. This complaint process consists of two stages, informal, or precomplaint counseling, and formal. Before filing a complaint, the employee must consult an EEO counselor at the agency in order to try to informally resolve the matter. The employee must contact an EEO counselor within 45 days of the matter alleged to be discriminatory or, in the case of a personnel action, within 45 days of the effective date of the action. Counselors are to advise individuals that, when the agency agrees to offer alternative dispute resolution (ADR) in the particular case, they may choose to participate in either counseling or in ADR. Counseling is to be completed within 30 days from the date the employee contacted the EEO office for counseling unless the employee and agency agree to an extension of up to an additional 60 days. If ADR is chosen, the parties have 90 days in which to attempt resolution. If the matter is not resolved within these time frames, the counselor is required to inform the employee in writing of his or her right to file a formal discrimination complaint with the agency. The written notice must inform the employee of the (1) right to file a discrimination complaint within 15 days of receipt of the notice, (2) appropriate agency official with whom to file a complaint, and (3) duty to ensure that the agency is informed immediately if the complainant retains counsel or a representative. After a complainant files a formal discrimination complaint, the agency must decide whether to accept or dismiss the complaint and notify the complainant. If the agency dismisses the complaint, the complainant has 30 days to appeal the dismissal to EEOC. If the agency accepts the complaint, it has 180 days to investigate the accepted complaint and provide the complainant with a copy of the investigative file. Within 30 days of receipt of the copy of the investigative file, the complainant must choose between requesting (1) a hearing and decision from an EEOC administrative judge (AJ) or (2) a final decision from the agency. When a hearing is not requested, the agency must issue a final decision within 60 days. A complainant may appeal an agency's final decision to EEOC within 30 days of receiving the final decision. In cases where a hearing is requested, the AJ has 180 days to issue a decision and send the decision to the complainant and the agency. If the AJ issues a finding of discrimination, he or she is to order appropriate relief. After the AJ decision is issued, the agency has 40 days to issue a final order notifying the complainant whether or not the agency will fully implement the decision of the AJ, and the employee has 30 days to file an appeal with EEOC of the agency's final order. If the agency issues an order notifying the complainant that the agency will not fully implement the decision of the AJ, the agency also must file an appeal with EEOC at the same time. Parties have 30 days in which to request reconsideration of an EEOC decision. Figure I illustrates the EEO complaint process. If a complaint is one that can be appealed to the Merit Systems Protection Board (MSPB) such as a removal, reduction in grade or pay, or suspension for more than 14 days, the complaint is a "mixed-case complaint." EEOC regulations provide that an individual may raise claims of discrimination in a mixed case, either as a mixed-case EEO complaint with the agency or a direct appeal to MSPB, but not both. A complainant may file a civil action in federal district court at various points during and after the administrative process. The filing of a civil action will terminate the administrative processing of the complaint. A complainant may file a civil action within 90 days of receiving the agency's final decision or order, or EEOC's final decision. A complainant may also file a civil action after 180 days from filing a complaint with his or her agency, or filing an appeal with EEOC, if no final action or decision has been made. In addition to the individual named above, Belva M. Martin, Assistant Director; Karin K. Fangman; Cindy Gilbert; Emily Hampton-Manley; Anthony Patterson; Rebecca Shea; Linda Sidwell (detailee); and Kiki Theodoropoulos made key contributions to this report.

Delays in processing of equal employment opportunity (EEO) complaints have been a long-standing concern. In 2000, as part of the Department of Defense's (DOD) fiscal year 2001 authorization act, Congress authorized DOD to carry out a 3-year pilot program for improving processes to resolve complaints by civilian DOD employees by testing procedures that would reduce EEO complaint processing times and eliminate redundancy, among other things. The act requires two reports from GAO--90 days after the first and last fiscal years of the pilot program's operation. In December 2005 and January 2006, we provided briefings on our initial review of the pilot program. This report (1) describes key features and status of the three programs and (2) assesses DOD's plan for evaluating the effectiveness of the pilot program. In August 2004, the Secretary of Defense authorized 2-year programs in (1) Defense Logistics Agency (DLA), (2) the Defense Commissary Agency (DeCA), and (3) components of the U.S. Air Force (USAF) which became operational in fiscal year 2005. While the legislation stated that the pilot program is exempt from procedural requirements of current Equal Employment Opportunity Commission (EEOC) regulations, to a large extent two of the three programs were designed and are operating within existing EEOC requirements, with a specific emphasis on alternative dispute resolution (ADR) as encouraged in DOD's memo soliciting pilot program proposals. ADR techniques include, but are not limited to, conciliation, facilitation, mediation, or arbitration and usually involve the intervention or facilitation by a neutral third party. After the first year, program officials reported low case activity and stated that they plan to request approval from the Secretary to continue their respective programs for a third year. To carry out the programs, officials used similar strategies--outreach to inform eligible staff about the pilot programs, staff training, and the use of electronic data collection--but implemented them differently. Our assessment of DOD's evaluation plan for the pilot program found both strengths and limitations. A sound evaluation plan contains such features as criteria for determining program performance and measures that are directly linked to program objectives. Such key features increase the likelihood that the evaluation will yield sound results, thereby supporting effective program and policy decisions. Lacking these key features, DOD is limited in its ability to conduct an accurate and reliable assessment of the program's results, and Congress is limited in its ability to determine whether features of the overall program have governmentwide applicability. Officials from DOD's pilot program oversight entities have acknowledged shortcomings and have indicated a willingness to modify the plan.

Since fiscal year 2011, DHS has used changes in the number of apprehensions on the southwest border between POEs as an interim measure for border security, as reported in its annual performance reports. As we reported in December 2012, our data analysis showed that apprehensions across the southwest border decreased 69 percent from fiscal years 2006 through 2011. These data generally mirrored a decrease in estimated known illegal entries in each southwest border sector. As we testified in February 2013, data reported by Border Patrol following the issuance of our December 2012 report show that total apprehensions across the southwest border increased from over 327,000 in fiscal year 2011 to about 357,000 in fiscal year 2012.assess whether this increase indicates a change in the trend for Border Patrol apprehensions across the southwest border. Through fiscal year 2011, Border Patrol attributed decreases in apprehensions across sectors in part to changes in the U.S. economy, achievement of strategic objectives, and increased resources for border security. It is too early to In addition to collecting data on apprehensions, Border Patrol collects other types of data that are used by sector management to help inform assessment of its efforts to secure the border against the threats of illegal migration and smuggling of drugs and other contraband. These data show changes, for example, in the (1) percentage of estimated known illegal entrants who are apprehended, (2) percentage of estimated known illegal entrants who are apprehended more than once (repeat offenders), Our analysis and (3) number of seizures of drugs and other contraband.of these data show that the percentage of estimated known illegal entrants apprehended from fiscal years 2006 through 2011 varied across southwest border sectors. The percentage of individuals apprehended who repeatedly crossed the border illegally declined by 6 percent from fiscal years 2008 through 2011. Further, the number of seizures of drugs and other contraband across the border increased from 10,321 in fiscal year 2006 to 18,898 in fiscal year 2011. Border Patrol calculates an overall effectiveness rate using a formula in which it adds the number of apprehensions and turn backs in a specific sector and divides this total by the total estimated known illegal entries--determined by adding the number of apprehensions, turn backs, and got aways for the sector. Border Patrol views its border security efforts as increasing in effectiveness if the number of turn backs as a percentage of estimated known illegal entries has increased and the number of got aways as a percentage of estimated known illegal entries has decreased. were not apprehended because they crossed back into Mexico) and got away data (entrants who illegally crossed the border and continued traveling into the U.S. interior) used to calculate the overall effectiveness rate preclude comparing performance results across sectors. Border Patrol headquarters officials stated that until recently, each Border Patrol sector decided how it would collect and report turn back and got away data, and as a result, practices for collecting and reporting the data varied across sectors and stations based on differences in agent experience and judgment, resources, and terrain. Border Patrol headquarters officials issued guidance in September 2012 to provide a more consistent, standardized approach for the collection and reporting of turn back and got away data by Border Patrol sectors. Each sector is to be individually responsible for monitoring adherence to the guidance. According to Border Patrol officials, it is expected that once the guidance is implemented, data reliability will improve. This new guidance may allow for comparison of sector performance and inform decisions regarding resource deployment for securing the southwest border. Border Patrol is in the process of developing performance goals and measures for assessing the progress of its efforts to secure the border between ports of entry and for informing the identification and allocation of resources needed to secure the border, but has not identified milestones and time frames for developing and implementing them. Since fiscal year 2011, DHS has used the number of apprehensions on the southwest border between ports of entry as an interim performance goal and measure for border security as reported in its annual performance report. Prior to this, DHS used operational control as its goal and outcome measure for border security and to assess resource needs to accomplish this goal. Operational control--also referred to as effective control--was defined as the number of border miles where Border Patrol had the capability to detect, respond to, and interdict cross-border illegal activity. DHS last reported its progress and status in achieving operational control of the borders in fiscal year 2010. At that time, DHS reported achieving operational control for 1,107 (13 percent) of 8,607 miles across U.S. northern, southwest, and coastal borders. Along the southwest border, DHS reported achieving operational control for 873 (44 percent) of the about 2,000 border miles. At the beginning of fiscal year 2011, DHS transitioned from using operational control as its goal and outcome measure for border security. We testified in May 2012 that the interim goal and measure of number of apprehensions on the southwest border between POEs provides information on activity levels but does not inform program results or resource identification and allocation decisions, and therefore until new goals and measures are developed, DHS and Congress could experience reduced oversight and DHS accountability. Further, studies commissioned by CBP have found that the number of apprehensions bears little relationship to effectiveness because agency officials do not compare these numbers with the amount of cross-border illegal activity. Border Patrol officials stated that the agency is in the process of developing performance goals and measures, but has not identified milestones and time frames for developing and implementing them. According to Border Patrol officials, establishing milestones and time frames for the development of performance goals and measures is contingent on the development of key elements of its new strategic plan, such as a risk assessment tool, and the agency's time frames for implementing these key elements--targeted for fiscal years 2013 and 2014--are subject to change. We recommended that CBP establish milestones and time frames for developing a performance goal, or goals, for border security between ports of entry that defines how border security is to be measured, and a performance measure, or measures, for assessing progress made in securing the border between ports of entry and informing resource identification and allocation efforts. DHS concurred with our recommendations and stated that it plans to set milestones and timeframes for developing goals and measures by November 2013. As part of its homeland security and legacy customs missions, CBP inspects travelers arriving at POEs to counter threats posed by terrorists and others attempting to enter the country with fraudulent or altered travel documents and to prevent inadmissible aliens, criminals, and inadmissible goods from entering the country. In fiscal year 2012, CBP inspected about 352 million travelers and over 107 million cars, trucks, buses, trains, vessels, and aircraft at over 329 air, sea, and land POEs. We have previously identified vulnerabilities in the traveler inspection program and made recommendations to DHS for addressing these vulnerabilities, and DHS implemented these recommendations. We reported in January 2008 on weaknesses in CBP's inbound traveler inspection program, including challenges in attaining budgeted staffing levels because of attrition and lack of officer compliance with screening procedures, such as those used to determine citizenship and admissibility of travelers entering the country as required by law and CBP policy. Contributing factors included a lack of focus, complacency, lack of supervisory presence, and lack of training. We recommended that CBP enhance internal controls in the inspection process, implement performance measures for apprehending inadmissible aliens and other violators, and establish measures for training provided to CBP officers and new officer proficiency. DHS concurred with these recommendations and has implemented them. Specifically, in January 2008, CBP reported, among other things, that all land port directors are required to monitor and assess compliance with eight different inspection activities using a self- inspection worksheet that is provided to senior CBP management. At that time, CBP also established performance measures related to the effectiveness of CBP interdiction efforts. Additionally, in June 2011, CBP began conducting additional classroom and on-the-job training, which incorporated ongoing testing and evaluation of officer proficiency. In December 2011, we reported that CBP had revised its training program for newly hired CBP officers in accordance with its own training development standards.convened a team of subject-matter experts to identify and rank the tasks that new CBP officers are expected to perform. As a result, the new curriculum was designed to produce a professional law enforcement officer capable of protecting the homeland from terrorist, criminal, biological, and agricultural threats. Consistent with these standards, CBP We also reported that CBP took some steps to identify and address the training needs of its incumbent CBP officers but could do more to ensure that these officers were fully trained. For example, we examined CBP's results of covert tests of document fraud detection at POEs conducted over more than 2 years and found weaknesses in the CBP inspection process at the POEs that were tested. In response to these tests, CBP developed a "Back to Basics" course in March 2010 for incumbent officers, but had no plans to evaluate the effectiveness of the training. Additionally, CBP had not conducted an analysis of all the possible causes or systemic issues that may have contributed to the test results. We recommended in December 2011 that CBP evaluate the "Back to Basics" training course and analyze covert tests, and DHS concurred with these recommendations. In April 2012, CBP officials notified GAO that it had completed its evaluation of the "Back to Basics" training course and implemented an updated, subsequent training course. In November 2012, CBP officials stated they had analyzed the results of covert tests prior to and since the implementation of the subsequent course. GAO is currently reviewing CBP's analysis of the covert test results and other documentation CBP has provided to determine the extent to which CBP has addressed this recommendation. Further, in July 2012 CBP completed a comprehensive analysis of the results of its document fraud covert tests from fiscal years 2009 to 2011. In addition, we reported that CBP had not conducted a needs assessment that would identify any gaps between identified critical skills and incumbent officers' current skills and competencies. We recommended in December 2011 that CBP conduct a training needs assessment. DHS concurred with this recommendation. In January 2013, CBP notified GAO it had developed a survey of incumbent officers to seek feedback on possible gaps in training. CBP is currently analyzing the survey results and preparing a report, which will recommend a path forward to address training needs. According to CBP, if an additional training need is identified and funding is available, CBP will develop or revise the current training program. In February 2013, CBP officials stated it plans to complete this process by April 15, 2013. Illegal cross-border activity remains a significant threat to federal lands protected by DOI and USDA law enforcement personnel on the southwest and northern borders and can cause damage to natural, historic, and cultural resources, and put agency personnel and the visiting public at risk. We reported in November 2010 that information sharing and communication among DHS, DOI, and USDA law enforcement officials For example, interagency forums were had increased in recent years.used to exchange information about border issues, and interagency liaisons facilitated exchange of operational statistics. However, gaps remained in implementing interagency agreements to ensure law enforcement officials had access to daily threat information to better ensure officer safety and an efficient law enforcement response to illegal activity. For example, in Border Patrol's Spokane sector on the northern border, coordination of intelligence information was particularly important because of sparse law enforcement presence and technical challenges that precluded Border Patrol's ability to fully assess cross-border threats, such as air smuggling of high-potency marijuana. We recommended DHS, DOI, and USDA provide oversight and accountability as needed to further implement interagency agreements for coordinating information and integrating operations. These agencies agreed with our recommendations, and in January 2011, CBP issued a memorandum to all Border Patrol division chiefs and chief patrol agents emphasizing the importance of USDA and DOI partnerships to address border security threats on federal lands. While this is a positive step, to fully satisfy the intent of our recommendation, DHS would need to take further action to monitor and uphold implementation of the existing interagency agreements to enhance border security on federal lands. DHS has stated that partnerships with other federal, state, local, tribal, and Canadian law enforcement agencies are critical to the success of northern border security efforts. We reported in December 2010 that DHS efforts to coordinate with these partners through interagency forums and joint operations were considered successful, according to a majority of these partners we interviewed. In addition, DHS component officials reported that federal agency coordination to secure the northern border was improved. However, DHS did not provide oversight for the number and location of forums established by its components, and numerous federal, state, local, and Canadian partners cited challenges related to the inability to resource the increasing number of forums, raising concerns that some efforts may be overlapping. In addition, federal law enforcement partners in all four locations we visited as part of our work cited ongoing challenges between Border Patrol and ICE, Border Patrol and Forest Service, and ICE and DOJ's Drug Enforcement Administration in sharing information and resources that compromised daily border security related to operations and investigations. DHS had established and updated interagency agreements to address ongoing coordination challenges; however, oversight by management at the component and local levels has not ensured consistent compliance with provisions of these agreements. We also reported in December 2010 that while Border Patrol's border security measures reflected that there was a high reliance on law enforcement support from outside the border zones, the extent of partner law enforcement resources that could be leveraged to fill Border Patrol resource gaps, target coordination efforts, and make more efficient resource decisions was not reflected in Border Patrol's processes for assessing border security and resource requirements. We recommended that DHS provide guidance and oversight for interagency forums and for component compliance with interagency agreements, and develop policy and guidance necessary to integrate partner resources in border security assessments and resource planning documents. DHS agreed with our recommendations and has reported taking action to address them. For example, in June 2012, DHS released a northern border strategy, and in August 2012, DHS notified us of other cross-border law enforcement and security efforts taking place with Canada. However, in order to fully satisfy the intention of our recommendation, DHS would need to develop an implementation plan that specifies the resources and time frames needed to achieve the goals set forth in the strategy. In November 2005, DHS launched the Secure Border Initiative (SBI), a multiyear, multibillion-dollar program aimed at securing U.S. borders and reducing illegal immigration. Through this initiative, DHS planned to develop a comprehensive border protection system using technology, known as the Secure Border Initiative Network (SBInet), and tactical infrastructure--fencing, roads, and lighting. Under this program, CBP increased the number of southwest border miles with pedestrian and vehicle fencing from 120 miles in fiscal year 2005 to about 650 miles presently. We reported in May 2010 that CBP had not accounted for the impact of its investment in border fencing and infrastructure on border security. Specifically, CBP had reported an increase in control of southwest border miles, but could not account separately for the impact of the border fencing and other infrastructure. In September 2009, we recommended that CBP determine the contribution of border fencing and other infrastructure to border security. DHS concurred with our recommendation and, in response, CBP contracted with the Homeland Security Studies and Analysis Institute to conduct an analysis of the impact of tactical infrastructure on border security. CBP reported in February 2012 that preliminary results from this analysis indicate that an additional 3 to 5 years are needed to ensure a credible assessment. Since the launch of SBI in 2005, we have identified a range of challenges related to schedule delays and performance problems with SBInet. SBInet was conceived as a surveillance technology to create a "virtual fence" along the border, and after spending nearly $1 billion, DHS deployed SBInet systems along 53 miles of Arizona's border that represent the highest risk for illegal entry. In January 2011, in response to concerns regarding SBInet's performance, cost, and schedule, DHS canceled future procurements. CBP developed the Arizona Border Surveillance Technology Plan (the Plan) for the remainder of the Arizona border. In November 2011, we reported that CBP does not have the information needed to fully support and implement its Plan in accordance with DHS and Office of Management and Budget (OMB) guidance. In developing the Plan, CBP conducted an analysis of alternatives and outreach to potential vendors. However, CBP did not document the analysis justifying the specific types, quantities, and deployment locations of border surveillance technologies proposed in the Plan. Specifically, according to CBP officials, CBP used a two-step process to develop the Plan. First, CBP engaged the Homeland Security Studies and Analysis Institute to conduct an analysis of alternatives beginning with ones for Arizona. Second, following the completion of the analysis of alternatives, the Border Patrol conducted its operational assessment, which included a comparison of alternative border surveillance technologies and an analysis of operational judgments to consider both effectiveness and cost. While the first step in CBP's process to develop the Plan--the analysis of alternatives--was well documented, the second step--Border Patrol's operational assessment--was not transparent because of the lack of documentation. As we reported in November 2011, without documentation of the analysis justifying the specific types, quantities, and deployment locations of border surveillance technologies proposed in the Plan, an independent party cannot verify the process followed, identify how the analysis of alternatives was used, assess the validity of the decisions made, or justify the funding requested. We also reported that CBP officials have not yet defined the mission benefits expected from implementing the new Plan, and defining the expected benefit could help improve CBP's ability to assess the effectiveness of the Plan as it is implemented. In addition, we reported that CBP's 10-year life cycle cost estimate for the Plan of $1.5 billion was based on an approximate order-of-magnitude analysis, and agency officials were unable to determine a level of confidence in their estimate, as best practices suggest. Specifically, we found that the estimate reflected substantial features of best practices, being both comprehensive and accurate, but it did not sufficiently meet other characteristics of a high-quality cost estimate, such as credibility, because it did not identify a level of confidence or quantify the impact of risks. GAO and OMB guidance emphasize that reliable cost estimates are important for program approval and continued receipt of annual funding. In addition, because CBP was unable to determine a level of confidence in its estimate, we reported that it would be difficult for CBP to determine what levels of contingency funding may be needed to cover risks associated with implementing new technologies along the remaining Arizona border. We recommended in November 2011 that, among other things, CBP document the analysis justifying the technologies proposed in the Plan, determine its mission benefits, and determine a more robust life cycle cost estimate for the Plan. DHS concurred with these recommendations, and has reported taking action to address some of the recommendations. For example, in October 2012, CBP officials reported that, through the operation of two surveillance systems under SBInet's initial deployment in high-priority regions of the Arizona border, CBP has identified examples of mission benefits that could result from implementing technologies under the Plan. Additionally, CBP initiated action to update its cost estimate for the Plan by providing revised cost estimates in February and March 2012 for the Integrated Fixed Towers and Remote Video Surveillance System, the Plan's two largest projects. We currently have ongoing work for congressional requesters to assess CBP's progress in this area and expect to issue a report with our final results in the fall of 2013. In March 2012, we reported that the CBP Office of Air and Marine (OAM)--which provides aircraft, vessels, and crew at the request of its customers, primarily Border Patrol--had not documented significant events, such as its analyses to support its asset mix and placement across locations, and as a result, lacked a record to help demonstrate that its decisions to allocate resources were the most effective ones in fulfilling customer needs and addressing threats. OAM issued various plans that included strategic goals, mission responsibilities, and threat information. However, we could not identify the underlying analyses used to link these factors to the mix and placement of resources across locations. OAM did not have documentation that clearly linked the deployment decisions in the plan to mission needs or threats. For example, while the southwest border was Border Patrol's highest priority for resources in fiscal year 2010, it did not receive a higher rate of air support than the northern border. Similarly, OAM did not document analyses supporting the current mix and placement of marine assets across locations. OAM officials said that while they generally documented final decisions affecting the mix and placement of resources, they did not have the resources to document assessments and analyses to support these decisions. However, we reported that such documentation of significant events could help the office improve the transparency of its resource allocation decisions to help demonstrate the effectiveness of these resource decisions in fulfilling its mission needs and addressing threats. We recommended in March 2012 that CBP document analyses, including mission requirements and threats, that support decisions on the mix and placement of OAM's air and marine resources. DHS concurred with our recommendation and stated that it plans to provide additional documentation of its analyses supporting decisions on the mix and placement of air and marine resources by 2014. DHS took action in 2004 to better monitor and control the entry and exit of foreign visitors to the United States by establishing the U.S. Visitor and Immigrant Status Indicator Technology (US-VISIT) program, which tracks foreign visitors using biometric information (such as fingerprints) and biographic information. DHS has incrementally delivered US-VISIT capabilities to track foreign entries, and a biometrically enabled entry capability has been fully operational at about 300 air, sea, and land POEs since December 2006. Since 2004, however, we have identified a range of DHS management challenges to fully deploying a biometric exit capability intended, in part, to track foreigners who had overstayed their visas and remained illegally in the United States. For example, in November 2009, we reported that DHS had not adopted an integrated approach to scheduling, executing, and tracking the work needed to deliver a comprehensive exit solution. In August 2010, we reported that the DHS pilot programs to track the exit of foreign visitors at air POEs had limitations curtailing the ability to inform a decision for a long-term exit solution at these POEs. GAO-10-13. GAO, Overstay Enforcement: Additional Mechanisms for Collecting, Assessing, and Sharing Data Could Strengthen DHS's Efforts but Would Have Costs, GAO-11-411 (Washington, D.C. Apr. 15, 2011). System--a database that contains information on aliens' entry, exit, and change of status--and electronically and manually comparing Arrival and Departure Information System records with 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. Additionally, DHS shares overstay information among its components through various mechanisms, such as alerts that can inform a CBP primary inspection officer at a POE of a nonimmigrant's history as an overstay violator, at which point the officer can refer the nonimmigrant to secondary inspection for a more in-depth review of the alien's record and admissibility. Furthermore, ICE's Counterterrorism and Criminal Exploitation Unit uses data provided by US-VISIT and various databases to identify leads for overstay cases, take steps to verify the accuracy of the leads, prioritize leads to focus on those identified as most likely to pose a threat to national security or public safety, and conduct field investigations on priority, high-risk leads. From fiscal years 2006 through 2010, ICE reported devoting a relatively constant percent of its total field office investigative hours to Counterterrorism and Criminal Exploitation Unit overstay investigations, ranging from 3.1 to 3.4 percent. We reported in April 2011 that DHS was creating electronic alerts for certain categories of overstays, such as those who overstay by more than 90 days, but was not creating alerts for those who overstay by less than 90 days to focus efforts on more egregious overstay violators, as identified by CBP. We recommended in April 2011 that DHS assess the costs and benefits of creating additional alerts, and DHS concurred with this recommendation. DHS has since reported that it would begin creating additional alerts, which could improve the chance that these individuals are identified as overstays during subsequent encounters with federal officials. We have additional work ongoing for congressional requesters in this area regarding DHS's identification of and enforcement actions against overstays and expect to issue a report with our final results in the summer of 2013. This concludes my statement for the record. For further information about this statement, please contact Rebecca Gambler at (202) 512-8777 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 making key contributions to this statement included Kathryn Bernet, Lacinda Ayers, and Jeanette Espinola, Assistant Directors; as well as Frances A. Cook, Alana Finley, Barbara Guffy, Lara Miklozek, and Ashley D. Vaughan. Border Patrol: Goals and Measures Not Yet in Place to Inform Border Security Status and Resource Needs. GAO-13-330T. Washington, D.C.: February 26, 2013. Border Patrol: Key Elements of New Strategic Plan Not Yet in Place to Inform Border Security Status and Resource Needs. GAO-13-25. Washington, D.C.: December 10, 2012. Border Patrol Strategy: Progress and Challenges in Implementation and Assessment Efforts. GAO-12-688T. Washington, D.C.: May 8, 2012. Border Security: Opportunities Exist to Ensure More Effective Use of DHS's Air and Marine Assets. GAO-12-518. Washington, D.C.: March 30, 2012. Border Security: Additional Steps Needed to Ensure Officers are Fully Trained. GAO-12-269. Washington, D.C.: December 22, 2011. Arizona Border Surveillance Technology: More Information on Plans and Costs Is Needed before Proceeding. GAO-12-22. Washington, D.C.: November 4, 2011. Overstay Enforcement: Additional Mechanisms for Collecting, Assessing, and Sharing Data Could Strengthen DHS's Efforts but Would Have Costs. GAO-11-411. Washington, D.C.: April 15, 2011. Border Security: Preliminary Observations on Border Control Measures for the Southwest Border. GAO-11-374T. Washington, D.C.: February 15, 2011. Border Security: Enhanced DHS Oversight and Assessment of Interagency Coordination is Needed for the Northern Border. GAO-11-97. Washington, D.C.: December 17, 2010. Border Security: Additional Actions Needed to Better Ensure a Coordinated Federal Response to Illegal Activity on Federal Lands. GAO-11-177. Washington, D.C.: November 18, 2010. Homeland Security: US-VISIT Pilot Evaluations Offer Limited Understanding of Air Exit Options. GAO-10-860. Washington, D.C.: August 10, 2010. Secure Border Initiative: DHS Has Faced Challenges Deploying Technology and Fencing Along the Southwest Border. GAO-10-651T. Washington, D.C.: May 4, 2010. Homeland Security: Key US-VISIT Components at Varying Stages of Completion, but Integrated and Reliable Schedule Needed, GAO-10-13. Washington, D.C.: November 19, 2009. Secure Border Initiative: Technology Deployment Delays Persist and the Impact of Border Fencing Has Not Been Assessed. GAO-09-896. Washington, D.C.: September 9, 2009. Border Security: Despite Progress, Weaknesses in Traveler Inspections Exist at Our Nation's Ports of Entry. GAO-08-329T. Washington, D.C.: January 3, 2008. 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At the end of fiscal year 2004, DHS had about 28,100 personnel assigned to patrol U.S. land borders and inspect travelers at air, land, and sea POEs, at a cost of about $5.9 billion. At the end of fiscal year 2011, DHS had about 41,400 personnel assigned to air, land, and sea POEs and along the border, at a cost of about $11.8 billion. DHS has reported that this stronger enforcement presence was one of several reasons why fewer people were attempting to illegally cross the border. However, challenges remain in securing the border. In recent years, GAO has reported on a variety of DHS border security programs and operations. As requested, this statement addresses some of the key issues and recommendations GAO has made in the following areas: (1) DHS's efforts to secure the border at and between POEs; (2) DHS interagency coordination and oversight of border security information sharing and enforcement efforts; and (3) DHS management of infrastructure, technology, and other assets used to secure the border. This statement is based on prior products GAO issued from January 2008 through February 2013, along with selected updates conducted in February 2013. For the selected updates, GAO reviewed information from DHS on actions it has taken to address prior GAO recommendations. U.S. Customs and Border Protection (CBP), part of the Department of Homeland Security (DHS), has reported progress in stemming illegal cross-border activity, but it could strengthen the assessment of its efforts. For example, since fiscal year 2011, DHS has used the number of apprehensions on the southwest border between ports of entry (POE) as an interim measure for border security. GAO reported in December 2012 that apprehensions decreased across the southwest border from fiscal years 2006 to 2011, which generally mirrored a decrease in estimated known illegal entries in each southwest border sector. CBP attributed this decrease in part to changes in the U.S. economy and increased resources for border security. Data reported by CBP's Office of Border Patrol (Border Patrol) show that total apprehensions across the southwest border increased from over 327,000 in fiscal year 2011 to about 357,000 in fiscal year 2012. It is too early to assess whether this increase indicates a change in the trend. GAO reported in December 2012 that the number of apprehensions provides information on activity levels but does not inform program results or resource allocation decisions. Border Patrol is in the process of developing performance goals and measures for assessing the progress of its efforts to secure the border between POEs, but it has not identified milestones and time frames for developing and implementing them, which GAO recommended that it do. DHS agreed and said that it plans to set a date for establishing such milestones and time frames by November 2013. DHS law enforcement partners reported improvements in interagency coordination and oversight of intelligence and enforcement operations, but gaps remain. GAO reported in November 2010 that information sharing and communication among federal law enforcement officials had increased; however, gaps remained in ensuring law enforcement officials had access to daily threat information. GAO recommended that relevant federal agencies determine if more guidance is needed for federal land closures and that they ensure interagency agreements for coordinating information and integrating operations are further implemented. These agencies agreed and in January 2011, CBP issued a memorandum affirming the importance of federal partnerships to address border security threats on federal lands. While this is a positive step, to fully satisfy the intent of GAO's recommendation, DHS needs to take further action to monitor and uphold implementation of the existing interagency agreements. Opportunities exist to improve DHS's management of border security assets. For example, DHS conceived the Secure Border Initiative Network as a surveillance technology and deployed such systems along 53 miles of Arizona's border. In January 2011, in response to performance, cost, and schedule concerns, DHS canceled future procurements, and developed the Arizona Border Surveillance Technology Plan (Plan) for the remainder of the Arizona border. GAO reported in November 2011 that in developing the new Plan, CBP conducted an analysis of alternatives, but it had not documented the analysis justifying the specific types, quantities, and deployment locations of technologies proposed in the Plan, which GAO recommended that it do. DHS concurred with this recommendation. GAO has ongoing work in this area and expects to issue a report in fall 2013. While this statement contains no new recommendations, GAO has previously made recommendations to DHS to enhance border security. DHS has generally concurred with these recommendations and has taken actions, or has actions planned or under way, to address them.

Benefit and loan programs provide cash or in-kind assistance to individuals who meet specified eligibility criteria. Temporary Assistance for Needy Families (TANF), SSI, Food Stamps, housing assistance, and student loans are representative of such programs. Some programs are administered centrally by federal agencies (such as SSI), while others are administered by states and localities (such as TANF). Benefit and loan programs often have difficulty making accurate eligibility and payment amount decisions because applicants and recipients provide much of the information needed to make these decisions, and the programs do not always have effective ways to verify that these individuals are fully disclosing all relevant information. The symposium, entitled "Data Sharing: Initiatives and Challenges Among Benefit and Loan Programs," was sponsored by GAO and the Chairman and Ranking Minority Member of the Senate Committee on Governmental Affairs. It was an impartial and balanced forum to explore the successes, problems, and possible future directions of data sharing among benefit and loan programs. The symposium consisted of an opening address by Sally Katzen, Deputy Director for Management of OMB, and four panels composed of four to six speakers each. Ms. Katzen's talk highlighted both the importance of data sharing and the need to protect individual privacy in the course of such sharing. Panel speakers then discussed how data sharing has benefited their programs, how technology offers new data- sharing possibilities, the privacy and security concerns that arise in a data- sharing environment, and how data sharing can be advanced among benefit and loan programs governmentwide. Panel speakers, who came from a variety of federal and state benefit and loan programs and the private sector, included officials from SSA, the Department of Labor, OCSE, the Department of the Treasury, and state human services departments, as well as representatives from the financial services industry and privacy advocates. Appendix I contains the symposium agenda, including the names and complete titles of the speakers. Many of the symposium speakers and audience participants referred to the National Directory of New Hires (NDNH). The Congress mandated that OCSE create this database as part of welfare reform primarily to aid in collection of interstate child support payments. The NDNH is maintained by OCSE and, to a large extent, is derived from reports that private employers and states are required to file containing information on newly hired employees, quarterly wage information, and quarterly unemployment insurance (UI) information. In addition, this database contains information on newly hired federal employees and quarterly wage information on all federal employees. OCSE matches these data against information it has on parents who are involved in child support cases and forwards the matched results to the state child support offices responsible for collecting the payments. The Social Security Act limits access to the NDNH to specific agencies for specific purposes. For example, Treasury (including the Internal Revenue Service ) has access to the NDNH to administer federal tax laws and to verify claims for the Earned Income Tax Credit. SSA also has access to help it administer the SSI and Old-Age, Survivors, and Disability Insurance (OASDI) programs. More recently, the Department of Education was granted access for purposes of obtaining the addresses of individuals who have defaulted on student loans or who owe grant repayments to Education. Sally Katzen, Deputy Director for Management of OMB, kicked off the data- sharing symposium by highlighting the importance of data sharing in achieving one of the top objectives contained in the administration's 2001 budget proposal: verifying that the right person is getting the right benefit at the right time. This objective is being accomplished in part by data sharing among agencies to identify when improper benefit and loan payments have been made to program recipients. Several symposium participants representing major benefit and other programs reported that shared information is predominantly used in computer matches. That is, an agency compares the information it has on its program recipients against a file from another agency containing similar information to detect discrepancies, such as undisclosed income or assets. Once such discrepancies are detected, the agency investigates to determine if improper payments have been made and, if so, takes action to collect any overpayments and, sometimes, to remove the individual in question from the program. Agencies find such computer matches cost-effective because computers do most of the work. According to one symposium speaker, Pete Monaghan, an SSA official, the cost-benefit ratios of matches range from $20 to $40 of savings for every $1 spent to perform the match. Symposium speakers estimated that substantial savings accrue to programs that use computer matches to detect improper payments. According to Mr. Monaghan, SSA saves about $675 million annually by matching its OASDI and SSI program rolls against data from 10 to 12 federal agencies and 4,000 state and local jails to identify ineligible or overpaid individuals. (See table 1.) Mr. Monaghan also explained that SSA provides data that it maintains on U.S. workers and SSA program recipients to 10 to 12 federal agencies and all states and U.S. territories, and that the use of these data results in annual savings of $1.5 billion. Finally, many states have begun to participate in multistate matches, known as Public Assistance Report Information System (PARIS) matches, to identify welfare recipients who receive simultaneous benefits in more than one state. At the time of the symposium, two PARIS matches had been conducted, and 13 states and the District of Columbia had participated in the most recent one. Although comparable match results among participating states do not exist, Elliot Markovitz, from the Pennsylvania Department of Public Welfare, provided indications of the matches' effectiveness by reporting the results for the District of Columbia and selected states, including Pennsylvania. Pennsylvania and the District of Columbia determine results by estimating their annual savings for such public assistance programs as TANF and Food Stamps as a result of removing individuals from their rolls because they were found to be receiving benefits in another state. Pennsylvania estimated its annual savings at $2.8 million and removed 566 individuals from the rolls. These individuals accounted for nearly 16 percent of all cases that Pennsylvania county workers investigated as a result of the two matches. The District of Columbia put its annual savings at about $1 million and the number of individuals removed from the rolls as a result of one match at 382. These individuals accounted for about 18 percent of all PARIS cases investigated by the District of Columbia. Another agency that obtains a substantial amount of data from outside sources, OCSE, also made a presentation at the symposium. Although OCSE does not make benefit or loan payments, it is responsible for helping state child support offices collect child support payments from parents who are obligated to make such payments. In some cases, the law requires that these payments be used to offset public assistance benefits that the custodial parents received during periods when their ex-partners owed them child support. OCSE has data from two sources that are instrumental in collecting child support payments: the NDNH and financial account information on individuals from financial institutions. Donna Bonar, Acting Associate Commissioner at OCSE, reported that in Texas, the amount of child support payments collected increased $4 million (32.6 percent) the month after that state automated wage withholding and began using the results from the NDNH match and in Virginia, child support collections increased by an estimated $13 million (33 percent) in 1 year as a result of the NDNH match. For the financial institution match, OCSE submits electronic files containing the names of individuals who are delinquent in their child support payments to about 3,000 financial institutions, and these institutions respond to OCSE when such individuals have accounts with them. Over a three-quarter period (July 1999 through March 2000), OCSE received information pertaining to more than 879,000 individuals with accounts totaling approximately $3 billion. Child support offices are able to collect lump-sum payments from delinquent child support obligators on the basis of these accounts. Ms. Bonar reported that the highest lump-sum payment collected was $74,000, of which $34,000 went to the state to reimburse the TANF program and $40,000 went to the custodial parent, and lump-sum payments commonly range from $20,000 to $30,000. Symposium speakers also discussed technologies that are expanding data- sharing opportunities and that offer new possibilities for data security. Three of the data-sharing applications discussed involve computer applications that make direct communication among computer systems possible. All three of these applications offer benefits to the government and the public, including the ability to verify program participant information and thereby detect improper payments sooner, or perhaps prevent them altogether. Integral to these discussions was how access to, and use of, shared information could be appropriately limited to official personnel for authorized reasons related to program administration. Another technological advancement discussed at the symposium was biometric identification systems, which are used to help ensure data security and prevent improper payments. These automated systems scan parts of the human body and, through a comparison with a previous scan, verify a person's identity. Three presentations focused on how technology has enabled government agencies to request information from and transmit it among different types of computer systems via the Internet or other network. These exchanges are possible because new types of software can facilitate communications between computers, translating information from one system into a format that is understandable by another system and end user, a capability known as interoperability. With interoperability, clusters of related computer systems can be linked, allowing information to be accessed and shared by many programs with similar purposes. In one presentation, Marty Hansen, with SSA, and Ian Macoy, with NACHA--The Electronic Payments Association, focused on how agencies might access financial account information electronically from financial institutions. For benefit programs whose payments are based on need, agencies must know about the assets of applicants and recipients to determine what payment, if any, individuals are entitled to receive. In 1999 alone, according to SSA quality assurance reviews, unreported bank account balances resulted in approximately $240 million in overpayments in the SSI program. Historically, obtaining timely and accurate bank account information from the 20,000 financial institutions in the United States has not been cost-effective for agencies administering needs-based benefit programs; thus, such checks have been done only under certain circumstances. However, automating the process would greatly reduce the burden of requesting and retrieving such information for both the agencies and the financial institutions. A network that provided secure access, delivery, and storage for financial account information could enable benefit programs to prevent hundreds of millions of dollars in overpayments. The speakers proposed two technological alternatives for devising such a system. One possibility would be to "piggyback" on the previously discussed matching being done by financial institutions with OCSE. Another would be to set up a centralized list of beneficiaries and ask financial institutions to match their account holders against the list via network connections. This alternative could be made more attractive to financial institutions in two ways. First, if the information was shared by all the agencies needing account information, the financial institutions could avoid responding repeatedly to similar inquiries communicated through different avenues. Second, if financial institutions could also use the network to exchange information among themselves for commercial purposes, they would be motivated to participate. In presenting these alternatives, the speakers acknowledged that privacy is an issue that must be addressed. A second presentation focused on how the model for DOD's health care benefit delivery system could be adapted to meet the data-sharing needs of benefit programs. According to William Boggess, an official with the DMDC, the DOD system provides a broad range of information on the 23 million beneficiaries of the military health care system. The system consists of a central computer system containing identifying information on beneficiaries linked to a network of "satellite" computer systems containing databases of other information about the beneficiaries, including medical, dental, immunization, and pharmaceutical records; benefit entitlement; and security clearances, among others. With this network of databases, Mr. Boggess said that DOD is able to respond, on average, within 4 seconds to over a million information requests each day from more than 1,400 locations in 13 countries. Mr. Boggess then described how government agencies might improve their payment accuracy and program integrity if they created a nationwide network of benefit programs based on the DOD approach. A central database containing identifying information about the individual could be linked to the computer systems used by such programs as TANF, Food Stamps, SSI, Medicaid, and Medicare. Each agency could access the information it needed from any of the databases in the network, and each agency would have responsibility for maintaining the data in its own database. If agencies shared their data in this manner, individuals applying for or receiving benefits from multiple agencies could provide much of the information that these agencies needed only one time, to one agency. In addition, access to the databases of other agencies would make it possible for an agency to verify information provided by applicants and recipients to help ensure that benefits are provided only to those who are entitled to them. David Temoshok, with GSA's Office of Governmentwide Policy,explained how GSA is helping the Department of Education pilot a project involving a system of linked databases containing information on postsecondary educational and financial opportunities. These databases contain information on scholarships, loans, and grants; admission; registration; and student financial aid accounts. The pilot project uses interoperability technology to provide a Web-based exchange of the information among many different computer systems. This system is intended to help student and financial aid administrators by presenting useful information in one place. In particular, agencies and lenders should be able to make better decisions because they will be able to access integrated student accounts via this system. A number of speakers pointed out that while interoperability technology has improved the ease and efficiency of broad-based data sharing, it has also greatly increased the need for security in data sharing.When information can be accessed or exchanged at numerous locations by many users, it is critical to have security measures in place that can control and track access. Mr. Temoshok described four basic elements that the federal government requires for the secure electronic exchange of information over networks: user identification and validation, secure transmission of data, assurance that the data are not changed in transmission, and assurance that parties to a transaction cannot later repudiate the transaction. To provide these elements, the federal government, under the leadership of OMB, is encouraging federal agencies to incorporate public key infrastructure (PKI) into their computer environments when warranted. Richard Guida, Chairman of the Federal PKI Steering Committee, explained that PKI is a method whereby an individual generates a pair of digital keys, which are very large numbers, about 150 digits in length. One of these keys is called the private key because the individual keeps it to him- or herself. The other key is called the public key, and it is provided to anyone with whom the individual wishes to interact electronically. This latter key is made publicly available in the form of a digital certificate, which is an electronic credential that binds an individual's identity to the public key. Using these public and private keys, it is possible to electronically place and then verify a person's identity and ensure that electronic files do not get changed before, during, or after electronic transmissions. It is also possible to encrypt the information to ensure its privacy. Biometric identification, which can be used both to prevent unlawful access to government records and to help identify improper benefit and loan payments, was also discussed at the symposium. Biometric identification systems scan unique physical features, such as fingers, eyes, faces, or hands, and convert the information to a digital format that can be stored in a computer or on an identification card. That information can be compared to earlier scans to verify a person's identity. The symposium speaker on this subject, David Mintie, an automated systems manager with the Connecticut Department of Social Services, said that human services departments around the country have begun using this technology (primarily finger imaging) as it has become affordable and practical to reduce and deter fraud and abuse. Mr. Mintie explained that when the identity of an individual can be readily established and verified, benefit recipients are much less likely to obtain benefits under false or duplicate identities in more than one city or state. Moreover, because the individual's identity can be verified before benefits are paid out, biometric identification can prevent improper payments from being made, not merely identify instances in which improper payments have already been made. In 3 years of operation, one type of biometric identification, finger imaging, prevented $23 million in improper payments in Connecticut and $297 million in New York. Texas estimates that the Food Stamp program avoided over $5 million in improper payments in that state in fiscal year 1999 as a result of finger imaging, and California estimates having saved $86 million in seven counties in the first 2 years of using finger imaging. At the time of Mr. Mintie's presentation, 8 states were using biometric identification systems, and 21 others were either planning biometric systems or pursuing legislation to use biometrics. As a "next step," some of these states are working on developing standards for sharing and matching biometric fingerprint files among states. Such sharing, according to Mr. Mintie, could be a valuable tool for identifying individuals who receive duplicate welfare benefits in more than one state and for enforcing the nationwide 5-year time limit for receipt of welfare benefits. This sharing would enable welfare agencies not only to verify an individual's identity, but also to check an individual's welfare history when that person applied for benefits. In the absence of a nationwide system to track receipt of benefits, a welfare recipient nearing the end of the 5-year eligibility could simply relocate to another state and make a new application for benefits. Perhaps the single most important concern about sharing personal information among government programs is whether it can be done without sacrificing an individual's right to personal privacy. Although symposium speakers and audience participants who discussed privacy issues agreed that it is important to protect this right, they disagreed about the extent to which data sharing threatens it. Opinions also varied among symposium speakers and audience participants on how the nation's privacy laws should be changed. According to symposium speakers who discussed risks to privacy, the first risk to individuals is that their personal information may be wrongfully disclosed and perhaps misused. Such disclosure and misuse can occur when agency staff access data obtained from outside sources either without authorization to do so or, if authorized, for purposes unrelated to that authorization. Although this same type of abuse can occur with an agency's own data, the unease about data sharing is that, as the number of agencies and individuals who have access to personal information increases, so do the chances of wrongful disclosure and misuse of that information. Although privacy advocates acknowledged that technologies exist that make wrongful disclosure and misuse of information somewhat more difficult and less likely, they believed that such tools have not, and cannot, always prevent such abuses. Others believed, however, that existing and new technologies have successfully managed this risk and will continue to do so. They cited such techniques as sending electronic data to other agencies over dedicated, secure computer lines; installing software that authenticates users and gives them access to only data that they are authorized to examine; establishing anomaly detection that notifies officials when a user has accessed something out of the ordinary; and using PKI. The second risk to privacy that symposium speakers and audience participants described is that it is becoming more difficult for the public to know what personal information government agencies are maintaining in databases and how they are using it. The speakers viewed this limited public awareness as important because it inhibits society's ability to monitor what the government is doing with personal information. It also means that society's views about how the government is using such information are not being factored into political and public policy decisions. Finally, the speakers characterized the limited public awareness about the wealth of information contained in databases as an increasing problem, given that technology has made it much easier to amass large amounts of information and to share it with others. The NDNH was frequently used to illustrate these concerns during the symposium. Section 453 of the Social Security Act specifies the agencies that may use this database for purposes unrelated to the collection of child support payments and the purposes for which this use is permissible.Privacy advocates were concerned about these "secondary" uses of the NDNH because they saw them as conflicting with a fundamental privacy principle, embodied in the Privacy Act, that data acquired for one purpose should not be used for a different purpose without the consent of the data subject. The Privacy Act provides 12 exceptions to this prohibition against disclosure without written consent, 1 of which benefit and loan agencies use to justify most of their data-sharing activities. This exception is called "routine use." Under routine use, an agency may not disclose data unless the use of the data is compatible with the purpose for which the data were collected. Privacy advocates said that it is hard to see how using the NDNH data for such secondary purposes as the administration of SSA, IRS, and Education programs is compatible with the original purpose of the NDNH: helping collect child support payments. Moreover, because the NDNH database is the most comprehensive and centralized information source that exists on the earnings of U.S. workers, privacy advocates fear that it will be sought by many other agencies for uses that the database subjects never contemplated. Other symposium participants also saw the NDNH database as a valuable source of information for benefit and loan programs but did not see sharing this information as a threat to personal privacy. One audience participant mentioned, for example, that this information already exists in each of the states and that collecting it in a single federal file does not necessarily violate an individual's privacy. Some participants also believe that the public does have an opportunity to learn about, and comment on, new data- sharing initiatives involving NDNH data. For example, the Privacy Act requires that such initiatives be posted in the FederalRegisterfor the purpose of public review and comment. Moreover, the public can learn about proposals for expanded access to NDNH data because such access is controlled to a large extent by legislation. Symposium speakers discussed two key privacy laws that govern data sharing among benefit and loan agencies: section 6103 of the Internal Revenue Code and the Privacy Act, which includes the Computer Matching and Privacy Protection Act amendment. These laws were enacted in part to control whether and how tax return and personal information maintained by federal agencies could be shared. The laws describe situations in which an agency may disclose personal data. Section 6103 does this by specifically naming agencies that may have access to certain items of tax return information and specifying the conditions under which such access may be granted. The Privacy Act does this in part through the routine use provision described above. The Privacy Act also requires that agencies enter into written agreements when they share information that is protected by the Privacy Act for the purpose of conducting computer matches. These agreements, referred to as matching agreements, detail the information that will be exchanged, how the exchanges will occur, and how the receiving agency will verify the results of the match and keep the data secure. The Privacy Act and section 6103 were written in the 1970s, when many of today's advanced data-sharing capabilities did not exist. For example, according to Robert Veeder, a former OMB official who was responsible for overseeing the implementation of the Privacy Act, much of the data that were covered by this act existed on paper; thus, electronically sharing this information was relatively difficult. Mr. Veeder also said that it was much harder for agencies to share information electronically in those few cases in which there were electronic files of data because interoperability among computer systems did not yet exist. Privacy advocates believe that the technological changes that have occurred since the 1970s warrant that we as a society reexamine the type of data that we would like shared among government agencies and the extent to which such sharing should occur. In the absence of such a debate, these individuals believe that data sharing on the scale of the NDNH database will become the norm. Although other symposium speakers and audience participants also felt that the privacy laws should be changed, their comments focused on amending specific provisions that they felt make data sharing overly cumbersome yet do little to ensure that personal privacy is protected. One frequently cited provision that benefit and loan officials would like to see changed concerns the time limits on computer-matching agreements. Currently, under the Privacy Act, an initial computer-matching agreement between two agencies may remain in effect for only 18 months. After that, an extension must be negotiated between the agencies, and this extension may remain in effect for only 12 months. Once this 12-month period expires, the agencies must negotiate an entirely new agreement. The time limits on computer-matching agreements were intended to cause agencies to periodically reassess the matches they conduct. Although officials believe that having time limits is valuable, they also argue that the limits are too short. Officials believe, for example, that the renegotiations can be time-consuming and burdensome and that the newly negotiated agreements often add no value to the data-sharing efforts because substantive changes are not often made to the computer matches themselves. Mr. Monaghan reported, for example, that most of the time of his staff is spent renegotiating these agreements, but that in reality this work is little more than a paper exercise. He also stated that SSA is drafting proposed legislation that would increase the time limit on new agreements to 5 years with a 3-year extension. We also suggested in a recent report on data sharing that the time limits on computer matching agreements be extended.We reported that the appropriate time periods for new and renewed agreements are subject to debate, but that they range from 3 to 5 years for new agreements and 2 to 3 years for existing agreements. Another topic discussed during the symposium was how data sharing should be advanced among benefit and loan agencies. An integral part of these discussions was the concern that any enhancements to data sharing be weighed against the need to protect personal privacy. Many of those who discussed such enhancements advocated that they include the necessary technological and legal protections to safeguard personal privacy. Some of these discussions focused on methods for facilitating data sharing governmentwide, while others addressed specific data-sharing initiatives. Data sharing is not always an agency priority because program officials feel they do not have enough staff and resources to handle additional data- sharing projects while still handling the work of their programs. Two speakers mentioned, for example, that some state human services departments might not be participating in interstate computer matches designed to detect recipients receiving benefits in more than one state because their current priority is to seek out potentially eligible recipients. Another speaker, Mr. Monaghan of SSA, mentioned that his agency would need additional resources to respond to every outside request for information because it is fully occupied with managing and operating its programs and enhancing its own matching activities. Given that agencies are not always willing or able to take on data-sharing projects, some symposium speakers felt a need for an oversight body with authority to initiate and manage such projects. Thomas Stack, Director of Human Resources with Maximus Incorporated and until recently the Senior Advisor for Credit and Cash Management at OMB, described his vision of a board or committee composed of officials from various levels of government and the private sector. Such a group could be headed by OMB and include an equal number of members from key federal and state benefit and loan programs. It could develop a working group to support data sharing and establish software and hardware standards for agencies wishing to participate in data exchanges. The board could evaluate data- sharing proposals, addressing issues such as financing, management, timing, assigning the work, and examining the privacy implications. The board could also have some authority to decide which agencies should have access to the data of other agencies, and to what extent, and establish the required security controls for agencies wishing to access the data. In discussing the funding of a network that could support such broad-based data sharing, Mr. Stack pointed out that the federal government made an estimated $19 billion dollars in improper payments in fiscal year 1998. Estimating that such a network would cost about $100 million to create, he proposed funding it with a portion of the program dollars that would be saved as a result of the reduced overpayments achieved through data sharing. Estimated program savings from current data sharing reported by symposium speakers amounts to more than $2 billion annually (see table 1). A second suggestion for improving data sharing governmentwide was to create incentives for agencies themselves to take on more data-sharing projects. One idea proposed by Mr. Stack and others would be to allow agencies to use some of the program dollars saved through data-sharing efforts to expand such efforts and to pursue cases in which data exchanges have indicated possible overpayments. Several officials from benefit and loan programs mentioned that access to the NDNH database maintained by OCSE would greatly aid in the administration of their programs. Patricia Dalton, the Acting Inspector General for the Department of Labor, gave several examples of how access to this database would help improve the payment accuracy and assess the effectiveness of Labor programs. Labor is engaged in a proactive effort to investigate potentially fraudulent cases involving the $32 billion UI program. This program provides partial wage replacement for those who lose their jobs through no fault of their own. Many fraudulent schemes concerning UI payments involve fictitious claimants or claimants with nonexistent employers. In one case investigated by Labor, over $625,000 in fraudulent UI benefits were paid. Ms. Dalton believes that routine and expeditious access to centralized wage databases, such as the NDNH, would enable Labor to more efficiently verify wage data submitted by program applicants and thereby identify potential overpayments before they occur. Symposium participants from other benefit programs, including TANF, Food Stamps, and Medicaid, also mentioned that NDNH data would be useful in controlling payment accuracy. These programs all depend on knowing the earnings of applicants and recipients to make correct initial and continuing eligibility decisions. In the cases of the Food Stamp, Medicaid, and Labor programs, the Congress would have to pass legislation granting access. The TANF program, however, has legislatively authorized access to the NDNH data, and it was envisioned that OCSE would ask the state agencies administering this program to go through their state child support agencies to get access. However, the state child support agencies often do not respond to TANF requests for information because of staff and resource concerns. According to Donna Bonar, OCSE Acting Associate Commissioner, OCSE intends to remedy this situation by developing a system under which the state TANF programs can obtain the information directly from OCSE. Another commonly suggested enhancement to data sharing frequently mentioned during the symposium was that, when possible, agencies use the data they obtain from outside sources during the application process. For example, agencies might query outside databases at the time of application to verify that applicants have disclosed their earnings accurately. This access to information could help prevent some overpayments from ever being made, as opposed to the current practice of using computer matches to identify such payments after they have occurred. Agencies could take this initiative without slowing down the application process by using electronic connections to outside databases to obtain the information immediately on-line or within a short period of time through a batched process. Several of the symposium participants believe this should be the future of data sharing. They believe that it would not only help ensure proper payments from the start but also enhance customer service, because the agency would obtain official verifications rather than requiring applicants to provide official documents, as is currently the case. While acknowledging these advantages of querying data sources, other participants think their programs need to evaluate it more thoroughly before deciding whether and how to implement it. One concern expressed by officials of various agencies, including OMB, is that querying data sources be done in such a way that individual privacy and data security are protected. Another concern is that the staff who make eligibility decisions are often overextended. Thus, before adding the requirement that they check outside databases, officials want to make sure it is cost-effective for the program as a whole. Direct connections between government agencies do exist and in certain situations are being used to verify applicant-reported information in an effort to ensure that the correct payments are made at the outset. SSA has a network of dedicated, secure lines to most federal agencies and all 50 states. SSA uses this network to electronically transfer data used in computer matches and to receive and respond to queries at periodic intervals. SSA is also using this network for on-line, direct access. SSA plans to have on-line access to OCSE's NDNH data in January of 2001 and hopes to stop many SSI overpayments stemming from undisclosed wages by requiring its field staff to check the NDNH database for undisclosed wages before issuing the first check to newly eligible SSI recipients. SSA is also providing data on the recipients of its programs' benefits on-line to seven state human services departments that administer TANF benefits. According to an SSA official, some of these states are using SSA's data at the time of application to prevent overpayments to TANF recipients who failed to disclose that they were also receiving SSA benefits.SSA hopes to eventually expand on-line access to human services departments nationwide. We are sending copies of this report to relevant congressional committees and other interested parties. We will make copies available to others upon request. If you have any questions about this report, please contact me on (202) 512- 7215. See appendix II for other GAO contacts and staff acknowledgments. Moderator--Sigurd Nilsen, Director, Education, Workforce, and Income Security Issues, GAO This final session was a series of discussions led by congressional staff and representatives from the states, the private sector, the General Services Administration, and the Department of Agriculture. In addition to those named above, the following individuals made important contributions to this report: Roland Miller III, Jill Yost, Christopher Morehouse, Jeremy Cox, James Lawson, and Inez Azcona. 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. Ordersbymail: U.S. General Accounting Office P.O. Box 37050 Washington, DC 20013 Ordersbyvisiting: Room 1100 700 4th St. NW (corner of 4th and G Sts. NW) U.S. General Accounting Office Washington, DC Ordersbyphone: (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)

Data sharing among federal agencies that run federal benefit and loan programs is important for determining the eligibility of applicants and beneficiaries. A GAO symposium on data sharing highlighted various issues facing federal agencies in their efforts to prevent abuse of federal programs. Symposium speakers focused on the number of program dollars saved by interagency data exchanges. Agencies using computer matching have detected undisclosed income and welfare recipients who receive benefits from more than one state. Improved technologies offer agencies the opportunity to expand their data sharing efforts. Such technologies include computer systems that can communicate directly with other systems and computer networks that can obtain information directly from financial institutions. Symposium speakers agreed that applicants' privacy should be protected when personal information is shared among agencies, but they disagreed about the extent to which data sharing threatens it. Privacy laws and security-related technology provide individuals with some protection against the possible misuse of personal information, but symposium participants differed on whether these protections are adequate.

SSA pays retirement and disability benefits to both citizen and noncitizen workers who pay Social Security taxes and meet certain entitlement requirements. SSA also pays benefits to dependents of living workers and survivors of deceased workers who are entitled to benefits. Retirement, disability, and survivor benefits are known as Title II Social Security benefits. Historically, SSA paid benefits to noncitizens regardless of their work authorization status and/or lawful presence. SSA records earnings information for workers, regardless of their citizenship status, from earnings reports (IRS Form W-2, Wage and Tax Statement) submitted by employers and self-employed individuals. Workers in Social Security covered employment ("covered employment") contribute to Social Security either through payroll taxes or self-employment taxes. The earnings from these jobs are reported under a worker's SSN, if the individual has been assigned one. In cases where SSA is unable to match a worker's earnings report with a valid SSN, SSA records the worker's earnings in its Earning Suspense File (ESF), which electronically tracks such earnings. If workers later receive work authorization and SSNs, SSA will credit previous unmatched earnings to them, if they can show that such earnings in the ESF belong to them. SSA later determines whether a worker accrues enough work credits to receive benefits (also referred to as "quarters of coverage"). In addition to this, workers must meet certain age requirements and, in the case of disability benefits, have medical certification of their disability. An individual typically needs to work at least 10 years (which is equivalent to 40 work credits) and be at least 62 years old to qualify for retirement benefits. Fewer work credits are needed for disability benefits. In general, these applicants must also show recent employment history and that they have worked for a certain number of years prior to their disability, both of which vary with the worker's age. Dependents and survivors of workers may also qualify for benefits based on the workers' entitlement. However, noncitizen workers and their dependents or survivors applying for benefits after 1996 must also prove that they meet certain lawful presence requirements to receive benefit payments. While SSA previously paid benefits to all individuals who met Social Security entitlement requirements, without regard to their work authorization status, the Social Security Protection Act (SSPA) now prevents payment of benefits to noncitizens who lack authorization. According to a June 2005 Pew Hispanic Center report, about 6.3 million workers of the approximately 24 million noncitizens living in the United States in 2004 lacked such authorization. To qualify for benefits, Section 211 of the SSPA requires that claims based on a noncitizen worker assigned an SSN after 2003 prove that the worker meets one of the following requirements: has authorization to work in the United States or was temporarily admitted into the United States at any time as a business visitor or as a crewman under specified provisions of the Immigration and Nationality Act. Congress passed the SSPA in March 2004, but made its provisions retroactive to benefit applications based on SSNs issued on or after January 1, 2004. Although the provisions of Section 211 apply directly to noncitizen workers, they can also affect the entitlement of any person applying for a benefit on the worker's record. For example, if a noncitizen worker is ineligible for benefits under Section 211, a child claiming benefits on the worker's record would also be disallowed, regardless of the child's citizenship or immigration status. Noncitizens assigned SSNs before January 1, 2004, are not affected by Section 211 restrictions. For noncitizens who meet the conditions of Section 211 or are exempt from its requirements, SSA counts all earnings from covered employment-- including those from periods of unauthorized employment--toward their Social Security benefit. However, unauthorized workers no longer qualify for benefits if they were assigned an SSN on or after January 1, 2004, and do not meet the additional eligibility requirements under Section 211. In addition, since 1996, noncitizens and their noncitizen dependents or survivors must be lawfully present in the United States to receive benefits. If such noncitizens are entitled to benefits, but do not meet the lawful presence requirement, SSA approves their benefit application, but places their benefits in a suspended status, until they establish lawful presence. However, a noncitizen living outside of the United States may receive benefits under certain conditions. For example, a noncitizen may receive benefits outside of the United States if he/she is a citizen of certain countries that have agreements with the United States permitting such payments. In addition to Section 211, there are other initiatives to reduce unauthorized work activity by noncitizens. Employers are required under the Immigration Reform and Control Act of 1986 to review certain documents and certify whether their workers are authorized to work in the United States, making it illegal for employers to knowingly hire unauthorized workers. To assist employers with this effort, SSA and DHS are offering services to help them verify whether a noncitizen is authorized to work in the United States. For example, SSA and DHS jointly operate an employee verification service called the Basic Pilot Program, which assists employers in verifying employment eligibility of newly hired workers, based on DHS and SSA records. In addition, Congress has recently passed the REAL ID Act of 2005, which could make it more difficult for noncitizens to engage in unauthorized employment by placing restrictions on state issuance of driver's licenses and personal identification cards. Under the law, beginning in May 2008, federal agencies may not accept for any official purpose driver's licenses or identification cards issued by a state unless the state meets certain minimum standards. These standards must include requirements that the state (1) receives proof and verifies, among other things, the person's SSN, or verifies that the person is not eligible for one, and (2) receives valid documentary evidence that the person is in the United States legally. Also, the law requires that driver's licenses and identification cards issued to certain noncitizens must expire when the individual's authorized stay in the United States ends or, if there is no definite authorized period of stay, after 1 year. Despite these initiatives, however, there is evidence that many noncitzens are able to engage in unauthorized employment. For example, in an August 2005 study, the SSA Office of Inspector General found 85 cases involving noncitizens who were not authorized to work in the United States from its review of 100 randomly selected cases of 1,382 records involving individuals who had earnings posted to their Social Security earnings records from work done prior to receiving their SSN in 2000. SSNs were originally created to record workers' earnings; however, SSA has assigned them to individuals over the years for various nonwork purposes (called "nonwork SSNs"), such as general identification. In recent years, SSA has tightened the criteria for assigning such SSNs. SSA also assigns SSNs to noncitizens who are authorized to work in the United States, which are known as work-authorized SSNs. In fiscal year 2005, SSA issued 1.1 million original SSNs to noncitizens, fewer than 15,000 of which were nonwork SSNs. As of 2003, SSA had assigned some 7 million nonwork SSNs. SSA started tightening the requirements for assigning nonwork SSNs in 1996 when the Internal Revenue Service began assigning taxpayer identification numbers to assist individuals who did not qualify for a SSN in filing their taxes. SSA further tightened the requirements for assigning nonwork SSNs, primarily due to the terrorist attacks of September 11, 2001, limiting them only to noncitizens when (1) a federal statute or regulation requires that they be assigned an SSN to receive a particular benefit or service to which they are entitled or (2) a state or local law requires that they be assigned an SSN to receive entitled public assistance benefits. SSA has issued guidance and provided training to assist staff in processing benefit claims covered by Section 211; however, we found some improper determinations by staff and a lack of internal controls for detecting such errors. The claims with improper determinations consisted of 17 claims involving workers who were assigned nonwork SSNs after 2003, which should not have been approved, and 1 claim that was improperly disapproved. SSA agreed with our assessment and attributed the errors to staff's lack of familiarity with the new Section 211 requirements. Additionally, we found that letters sent to claimants to inform them of disapproval decisions did not always provide them with information on their right to appeal the decision and other required information. SSA has provided guidance and training to assist staff in reaching proper determinations for claims covered by Section 211. With the SSPA's passage in March 2004 and retroactive effective date of January 1, 2004, SSA acted quickly to provide guidance to its field offices by issuing an emergency message on Section 211 in April 2004. This message explained the various provisions of the new law and instructed staff to hold all noncitizen claims that could have a potential Section 211 issue until detailed guidance could be developed. In August 2004, SSA issued detailed guidance through its Program Operations Manual System (POMS). The guidance explained the new requirements for approving claims under Section 211 and provided several hypothetical scenarios to illustrate how the guidance should be applied. Some SSA regional offices provided additional written guidance on Section 211. For example, one regional office provided staff with guidance that compared claims processing procedures in effect before the passage of the SSPA with those required under Section 211. Although SSA's benefit application process is the same for citizens and noncitizens, Section 211 imposes additional requirements for claims based on a noncitizen worker assigned an SSN after 2003. For such claims, SSA's guidance on Section 211 directs field office staff to determine if the worker has work authorization or a record of prior entry into the United States for certain work purposes. This determination is in addition to the existing requirement that noncitizens residing in the United States who file for benefits are lawfully present to receive benefit payments or meet other conditions to receive benefit payments outside of the United States. To process applications for benefits, SSA field office staff meet with applicants to explain the benefits for which they might qualify and review the evidence supporting the claim. After a claims representative makes the initial determination, a field office supervisor or an experienced colleague reviews the claim for the appropriateness of the decision. Once a claims determination is made, SSA requires that field office staff send applicants a letter notifying them of the decision. For those claims disallowed as a result of Section 211 in which the primary worker lacked an SSN, SSA guidance requires field office staff to send a copy of the disallowance letter to agency headquarters. SSA headquarters uses this information to monitor the number of such cases, because there is currently no way to track this information in SSA's system without an SSN. SSA also provided training to field office staff to assist them in properly applying Section 211. In September 2004, SSA headquarters provided interactive video training on the SSPA, as part of its monthly training for newly issued transmittals, which included a general discussion of the requirements of Section 211, among other topics. SSA later circulated a written summary of the broadcast to field offices for training purposes. In November 2004, SSA headquarters issued a transmittal to its 800-number call centers to assist staff in addressing inquiries about Section 211. Additionally, managers at three of the four field offices we visited told us they used peer group discussions and more specific training to supplement the headquarters training. One field office manager developed and administered a test to assess staff's understanding of the Section 211 requirements. As part of our review, SSA provided us with records on all of the approximately 177,000 approved and disapproved claims that involved noncitizen workers--and therefore possibly covered by Section 211--that had been decided from January 2004 to December 2005. (See table 1.) These records included information on the type of claim, when the SSN was assigned, and whether the claimants were lawfully present. The majority of these claims were for retirement or disability benefits, which made up roughly 94 percent of all claims. In assessing SSA's claims determinations we found that 18 were erroneous. These 18 were; 17 approved claims based on noncitizen workers who had been assigned a nonwork SSN after 2003; and 1 disapproved claim in which SSA erroneously applied Section 211 to a survivor's parent who was not the primary worker. In 17 of the 19 approved cases we reviewed in which the primary workers had been assigned a nonwork SSN after 2003, we found that the determinations were erroneous because the workers lacked the work authorization or past qualifying work experience required under Section 211. Our review of SSA's records for the 17 erroneously decided claims showed that SSA paid benefits for 13 of the claims. In total, over the period of 2004 and 2005, SSA paid out approximately $110,000 for these claims, almost all of which was in the form of recurring monthly payments. For the remaining four claims, SSA never began benefit payments due to beneficiaries' lack of lawful presence or other reasons. In discussing the erroneously approved cases with SSA officials, they agreed that the cases had been improperly decided and said that the errors possibly resulted from some claims representatives' lack of familiarity with the new requirements of Section 211. Also, in an earlier discussion with SSA officials, we asked whether they had considered installing an automated systems control to identify potentially erroneous claims. The officials told us that although the agency indeed considered such a control, SSA management decided that it was not needed due to the low number of claims involving Section 211 that had been processed overall. For the 41 claims disapproved as a result of Section 211, we found that proper determinations had been made in all but one case. In assessing these cases, we reviewed all of the case file documentation. The documentation in some cases included only the letter notifying the claimant(s) of the disapproval decision, and in other cases this letter and a combination of other documents such as wage and earnings statements and immigration documentation. SSA disapproved 38 of the 41 claims because the primary worker lacked work authorization and had never been issued an SSN. Although the workers for the remaining three claims had been assigned SSNs after 2003, their claims were disapproved because they lacked work authorization. In several of the cases, it appeared that that the primary workers had been employed in the United States and had paid Social Security taxes as documented by wage and earnings statements and other tax information included in the files. In some instances, the claimants said that the SSN that the worker had used had been made up or belonged to someone else. For the one claim that was incorrectly decided, SSA based its decision on a survivor's claim for a child on the widow's lack of an SSN, instead of the primary worker who had been assigned an SSN prior to 2004. After further review of this claim, SSA officials agreed that the claim had been improperly disapproved based on Section 211, but stated that the claim would remain in a disapproved status pending additional evidence supporting the child's relationship to the deceased worker. In reviewing the 41 letters sent to claimants to inform them of disapproval decisions based on Section 211, we found that SSA staff did not always provide the claimants with information on their appeals rights and other required information. For example, in most cases, the letters did not inform claimants of their right to representation for appeals or refer them to a pamphlet explaining their right to question the decision as required by SSA's guidance. Also, in several cases, the letters did not apprise claimants of their right to appeal the decision or provide instructions on how to file an appeal. SSA field managers and staff told us that these inconsistencies occur because they lack a standardized format for preparing such disapproval letters. They suggested that automating the letters would help ensure that they provide all required information to claimants. When claimants do not receive such information, they could fail to file an appeal or secure representation on their behalf. As a result, claimants who might be found eligible for benefits upon appeal would not receive benefits to which they may be entitled. Though its impact may grow over time, Section 211 has not yet significantly reduced benefits to noncitizens; the law's restrictions, however, may not prevent benefits for certain temporary noncitizen workers who could engage in work not authorized by their visas. As of December 2005, SSA had disapproved only 41 claims of some 72,000 disapproved noncitizen-related claims due to Section 211 because SSA determined that the workers involved in the claims lacked necessary work authorization. While the number of disapproved claims could increase as more noncitizens file for retirement or disability claims in the coming years, there are still certain temporary workers who, upon receiving an SSN, could engage in employment not authorized by their visas. If these noncitizens remain in the country long enough after their visas expire, they could potentially earn enough work credits in such employment to eventually qualify for benefits. Because Section 211 does not apply to claims based on noncitizen workers assigned SSNs prior to 2004, the law has not significantly reduced the number of noncitizens receiving benefits. However, the number of disapproved claims will likely increase as unauthorized workers file for benefits in the coming years. During 2004 and 2005, SSA disallowed roughly 72,000 of some 177,000 claims involving noncitizen workers, of which only 41 were disallowed because they lacked the necessary work authorization required under Section 211. In addition to the Section 211 exemptions, according to SSA officials, the minimal impact of the law to date may also be a result of unauthorized workers not applying for benefits after concluding that they would not be eligible. As of December 2005, SSA approved roughly 60 percent of the approximately 177,000 claims, almost all of which involved noncitizens who were assigned a work-authorized SSN prior to 2004. Our review also showed that SSA disallowed roughly 72,000 benefit claims involving a noncitizen worker, almost always due to reasons other than Section 211. Almost 54,000 (74 percent) were disapproved because the primary worker upon whom the claim was based did not have sufficient work credits to qualify for disability benefits, which requires fewer than the 40 work credits generally required for retirement benefits. In addition, approximately 19,000 (26 percent) claims were disapproved because the primary worker did not have sufficient work credits to qualify the claimant(s) for retirement or survivor benefits (fig. 1). Although SSA has disallowed only 41 claims as a result of Section 211 requirements, the number will increase in future years as more unauthorized workers reach retirement age or become disabled. While the 41 disallowed claims affected workers who had applied for retirement or disability benefits, they predominantly affected claimants applying for survivor benefits. In fact, 31 of the 41 claims were for survivor benefits. These claims in several cases involved survivors who were U.S. citizens. In some of these cases, survivors of deceased workers were denied benefits because the worker did not meet the requirements of Section 211, even though the worker had enough work credits to qualify the claimants for survivor benefits. While SSA data for the approximately 105,000 claims approved during 2004 and 2005 shows that 97 percent of the workers assigned SSNs before 2004 had work authorized SSNs, there are millions of noncitizens assigned nonwork SSNs before 2004 who may qualify for benefits in the coming years because Section 211 does not affect them. As figure 2 shows, 3,130 claims were made based on noncitizen workers issued nonwork SSNs before 2004. Even with Section 211 restrictions, opportunities may still exist for certain noncitizens assigned SSNs after 2003 to collect benefits without current work authorization. For example, some temporary workers--often referred to as nonimmigrants--legally admitted into the United States may receive benefits based on work not authorized by their visas. Currently, the Social Security Act directs SSA to take steps to issue SSNs to certain noncitizen visa holders granted permission to work in the United States by DHS under certain temporary visas. Such noncitizens include, among others, college students, camp counselors, and international dignitaries. (We selected certain visa categories under which noncitizens temporarily in the United States were most likely to receive a work authorized SSN based on information received from SSA. See app. II for a detailed description of the nonimmigrant classifications we used.) Between 2000 and 2004, SSA issued approximately 1 million SSNs to these noncitizens, and as shown in figure 3, the number of these SSNs substantially increased after 2001. By using their work authorized SSN, these workers could engage in employment covered by Social Security, but not authorized by their visa (which is considered illegal employment). If these workers accumulate enough work credits by overstaying their visas and meet age and other entitlement requirements, they would qualify for benefits based on the work authorized designation of their SSN. SSA's Office of the Inspector General estimated that out of the approximately 795,000 temporary visa holders that had received an SSN regardless of their visa type during fiscal year 2000 alone, some 32,000 had either continued working after their immigration status expired or may have allowed someone else to use their SSN to work after they left the United States. SSA officials acknowledged that it was possible for these temporary workers to obtain benefits by using their SSN to engage in employment not authorized under their visa. However, they said that the likelihood of this occurring was low, because such individuals would probably not stay in the country long enough to accrue sufficient work credits or meet lawful presence requirements. As demonstrated by the Office of the Inspector General report, however, temporary visa holders do, in many instances, continue working after their visas expire. Also, if temporary visa holders accrue sufficient work credits and meet other eligibility requirements, they may be able receive benefits without meeting the lawful presence requirement under certain conditions. For example, such temporary visa holders could receive benefits if they apply for benefits outside of the United States if they are citizens of certain countries that have agreements with the United States permitting such payments. Should such instances occur, SSA would be limited in its ability to detect them because it does not have the mechanisms to distinguish between individuals' authorized and unauthorized employment. Section 211 has imposed new restrictions on the payment of Social Security benefits to noncitizens who work without authorization, but, not surprisingly, few have been denied benefits thus far. Under the law, noncitizens may continue to have earnings from unauthorized employment credited toward their benefits entitlement if they received their SSN in 2003 or earlier, or if their nonwork SSN was assigned after 2003 and they later obtain work authorization. Over time, however, this provision of the law will likely exert a greater impact on benefits paid based on unauthorized work. Although Section 211 will not prevent all such benefit payments, as in the instance regarding certain temporary visa holders, the new law is making a small but potentially growing difference. It will be important for SSA to continue to monitor the law's impact and, to the extent practicable, identify the remaining situations permitting benefit payments based on unauthorized work if they prove significant and measurable. Meanwhile, SSA needs to take actions to ensure that Section 211 is properly administered. Our findings show that, in implementing Section 211, SSA has taken steps to prevent the payment of benefits for claims involving workers who lack work authorization, but additional actions are needed to ensure that claims are properly decided and that all claimants receive necessary information concerning the decision. Because we identified 17 claims that had been approved in error, developing an internal control to identify potentially erroneous claims decisions could reduce future errors. Additionally, it is important that SSA staff receive additional training on the proper application of Section 211 for claims approved after 2004 in which workers lack work authorization. Without such measures, benefits may be paid to those who are not entitled to them and denied to those who are. Given the fact that over time the number of unauthorized workers reaching retirement age or becoming disabled will likely increase and therefore be subject to Section 211, these measures could help SSA ensure the integrity of the Social Security program and avoid erroneous payments. Also, with regard to disapproved claims, SSA has not developed a way to ensure that all unsuccessful applicants receive information on both their right to appeal the decision and information regarding whom to contact for questions about the decision--as required by its own policy. As a result, applicants who do not receive such information may not understand that they can appeal the decision, the process for filing an appeal, and the time frame within which such action must be taken. To assure proper benefit eligibility determinations and appeals processes, we recommend that the Commissioner of Social Security: establish a control to identify potentially erroneous claims decisions for unauthorized workers assigned SSNs after 2003, such as an electronic edit check to identify such claims; provide enhanced training to staff to assist them in properly processing claims covered by Section 211; and develop a standardized format for disapproval letters to ensure that staff provide applicants with all required information regarding the disapproval decision. 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 additional technical comments, which have been included in the report as appropriate. SSA agreed with our recommendations and discussed various actions it is taking to address them. In response to our first recommendation, SSA stated that it had implemented a new edit check into its Disability Insured Status Calculator Online program to screen for whether individuals meet the disability insured status rules. To assist staff in making proper claims determinations, SSA stated that the edit check generates an alert when an individual's SSN issue date is January 1, 2004, or later, and provides staff with a copy of the claims processing procedures relating to Section 211. While we commend SSA for its swift implementation of this action, we believe that this improvement still leaves room for erroneous claims determinations to go undetected. One reason for this is that SSA's action only provides such alerts for disability claims, potentially leaving thousands of retirement, dependent, and survivor claims susceptible to error. Also, this action still relies only on SSA staff to make proper determinations. However, as our review demonstrated, this step alone is not sufficient to detect claims that were improperly decided. Therefore, we believe that SSA should install an automated systems edit to identify potentially erroneous claims decisions as we recommended. In response to our second recommendation, SSA stated that it was updating its claims processing procedures relating to Section 211 of the SSPA and would provide staff with training on the new update when it is completed. Regarding our third recommendation, SSA stated that it would require staff to use a notice that provides standardized appeals language and information on the disapproval decision, as part of its update to the Section 211 guidance. This notice is located in SSA's Distributed Online Correspondence System, which is separate from the Program Operations Manual System that contains Section 211 guidance. While existing guidance on Section 211 instructs staff to include appeals language and other required information in letters explaining disapproval decisions, it does not provide the exact language that staff are to include in the letters. Consequently, staff must use their discretion in determining what language should be included. As our review found, this resulted in several letters that did not provide unsuccessful claimants with information on their right to appeal the disapproval decision and other required information. While providing staff with such standardized language is a step forward, it will require SSA staff to combine language from the Section 211 guidance explaining why the worker did not meet the requirements of Section 211 with the standardized language from the notice. We believe that having staff prepare the letters using information from two different places could increase the likelihood that all required information may not be included. Thus, we still believe that a standardized letter containing all of the required information regarding the disapproval decision is needed. 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 of this report to the Commissioner of SSA, the Secretary of DHS, and the Commissioner of IRS, and other interested parties. Copies will also be made available at no charge on GAO's Web site at http://www.gao.gov. If you have questions concerning this report, please call me on (202) 512-7215. Contact points for our Offices of Congressional Relations and Public Affairs, respectively, are Gloria Jarmon, who may be reached on (202) 512-4470, and Paul Anderson, who may be reached on (202) 512-4800. In assessing the Social Security Administration's (SSA) implementation of Section 211 and the adequacy of its policies and procedures, we reviewed the law and discussed its legal interpretation with GAO and SSA attorneys. We also reviewed prior GAO, SSA Office of Inspector General (OIG), Congressional Research Service (CRS), and other reports on the new law and related issues. We also reviewed various documents detailing SSA's guidance on Section 211. In particular, we examined relevant sections of SSA's Program Operations Manual System (POMS) that explained the procedures for processing claims covered by Section 211. We obtained information from officials in SSA headquarters in Baltimore, Maryland, and the four field offices we visited (Williamsburg Field Office in Brooklyn, New York, and the Culver City, Redlands, and Porterville Field Offices in California) on the training provided to staff. We selected the four field offices because of the geographic proximity of multiple offices in a single state and because the information that we had at the time of our visits showed that the offices had individually or collectively--within their region--processed a large number of claims that had been disapproved as a result of Section 211 requirements. To ascertain whether SSA made proper decisions for claims involving primary workers who were noncitizens, we reviewed: (1) all 19 approved claims in which SSA had assigned a nonwork SSN to the noncitizen workers after 2003, and (2) all 41 disapproved claims in which SSA had reached its decision as a result of the Section 211 requirements. To identify claims possibly covered by Section 211, we obtained data on claims that SSA had approved for benefit payments involving noncitzen workers between January 2004 and December 2005. SSA provided information on these claims from its electronic Master Beneficiary Record file, which maintains data on all benefit claims. From these files, we obtained data such as the filing date for the claim, the type of SSN assigned to the primary worker, the date the SSN was assigned to the worker, the type of claim, among other pieces of information. We reviewed these data from the Master Beneficiary Record for the 19 approved claims and discussed each of the claims with SSA officials. For the 41 claims that had been disapproved due to Section 211 requirements, we reviewed all of the available documentation associated with each claim and discussed the claims with SSA officials. The file documentation in some cases included only the letter notifying the claimant(s) of the disapproval decision, and in other cases, a combination of other documents such as earnings statements and immigration documents. Additionally, we discussed with managers and staff in the four SSA field offices we visited the claims that they had disapproved based on Section 211. We did not review any approved cases in the four field offices, because information on the approved cases for the offices was not available at the time. To more generally assess the extent to which Section 211 had impacted the payment of benefits for claims that involved primary workers who were noncitizens--and therefore possibly covered by Section 211--we obtained data on all such claims that SSA had decided between January 2004 and December 2005. This data showed that SSA had decided a total of approximately 177,000 claims, of which some 105,000 had been approved and 72,000 had been disapproved. To determine if there are circumstances under which certain noncitizens could still receive benefits based on unauthorized employment, we interviewed SSA headquarters officials and managers and staff in the four field offices we visited. We also obtained data from SSA on certain noncitizens issued temporary work visas that make them eligible to receive work-authorized SSNs. SSA officials identified 23 temporary visa categories that qualify individuals for such SSNs (app. II lists the 23 visa categories). We obtained data from SSA on the number of SSNs it had assigned to individuals for each of the visa types between 2000 and 2004. SSA's data showed that it had assigned almost 1 million SSNs to these temporary workers. We compared SSA's data to the number of temporary work visas that the Department of State had issued for the 23 visa types between 2000 and 2004 and found that SSA's overall numbers were reasonable. We also discussed with officials at the Internal Revenue Service and the Department of Homeland Security their policies regarding noncitizens issued temporary work visas. We conducted our work between February 2005 and January 2006 in accordance with generally accepted government auditing standards. The following team members made key contributions to this report: Blake Ainsworth, Assistant Director, Susan Bernstein, Mary Crenshaw, Jason Holsclaw, Kevin Jackson, Mimi Nguyen, Daniel Schwimer, Vanessa Taylor, and Paul Wright.

Continued high levels of unauthorized immigrant workers in the United States have fostered concerns about whether they should be eligible for Social Security benefits. Until recently, the Social Security Administration (SSA) allowed noncitizens to collect benefits, regardless of their work authorization status, provided that they met certain legal presence requirements. However, in March 2004, Congress passed the Social Security Protection Act, which under Section 211, requires that noncitizens assigned a Social Security number (SSN) after 2003 have work authorization from current or past qualifying work to collect benefits. This report describes (1) the steps SSA has taken to implement Section 211 and how effective SSA's policies and procedures are in preventing improper benefit decisions, and (2) how Section 211 has affected the payment of benefits to unauthorized workers. SSA has issued guidance and provided training to assist staff in processing benefit claims under Section 211, but the absence of certain internal controls has allowed some errors to go undetected. SSA issued detailed guidance in August 2004 and subsequently provided staff with training on the law, which some SSA field offices supplemented with additional training. Although SSA's policies and procedures were fairly detailed, GAO found several incorrect claims determinations and a lack of internal review for preventing them. With regard to the provisions of Section 211, GAO found that SSA improperly approved 17 of the 19 claims that involved noncitizen workers who had been issued SSNs after 2003 and who lacked required work authorization. GAO also found that 1 of the 41 claims that SSA disapproved was improper. SSA officials stated that the improper determinations were likely due to staff's unfamiliarity with the new requirements. In addition, GAO found that letters sent to claimants informing them of disapproval decisions did not always contain all required information. Because Section 211 does not apply to noncitizens who were assigned SSNs before 2004, few noncitizens have been affected by the law thus far. Only 41 (less than 1 percent) of the approximately 72,000 noncitizen-related claims SSA disapproved during 2004 and 2005 were due to Section 211. It is likely that the number of disapprovals based on the law will grow as more unauthorized workers file for benefits in coming years. However, opportunities may exist for certain noncitizens who receive their SSNs after 2003 to collect benefits without current work authorization. For example, noncitizens who are issued SSNs under temporary work visas may be able to engage in work not authorized under their visas and subsequently claim benefits based on that work. Although SSA officials told GAO the likelihood of this occurring was low, the SSA Inspector General reported in 2005 that a significant number of temporary visa holders overstayed their visas.

BIE's Indian education programs derive from the federal government's trust responsibility to Indian tribes, a responsibility established in federal statutes, treaties, court decisions, and executive actions. It is the policy of the United States to fulfill this trust responsibility for educating Indian children by working with tribes to ensure that education programs are of the highest quality, among other things. In accordance with this trust responsibility, Interior is responsible for providing a safe and healthy environment for students to learn. BIE's mission is to provide Indian students with quality education opportunities. Students attending BIE schools generally must be members of federally recognized Indian tribes, or descendants of members of such tribes, and reside on or near federal Indian reservations. All BIE schools--both tribally-operated and BIE-operated--receive almost all of their funding to operate from federal sources, namely, Interior and Education. Specifically, these elementary and secondary schools received approximately $830 million in fiscal year 2014--including about 75 percent, or about $622 million from Interior and about 24 percent, or approximately $197 million, from Education. BIE schools also received small amounts of funding from other federal agencies (about 1 percent), mainly the Department of Agriculture, which provides reduced-price or free school meals for eligible low-income children. (See fig. 1). While BIE schools are primarily funded through Interior, they receive annual formula grants from Education, similar to public schools. Specifically, schools receive Education funds under Title I, Part A of the Elementary and Secondary Education Act (ESEA) of 1965, as amended, and the Individuals with Disabilities Education Act. Title I--the largest funding source for kindergarten through grade 12 under ESEA--provides funding to expand and improve educational programs in schools with students from low-income families and may be used for supplemental services to improve student achievement, such as instruction in reading and mathematics. An Education study published in 2012 found that all BIE schools were eligible for Title I funding on a school-wide basis because they all had at least 40 percent of children from low-income households in school year 2009-10. Further, BIE schools receive Individuals with Disabilities Education Act funding for special education and related services, such as physical therapy or speech therapy. BIE schools tend to have a higher percent of students with special needs than students in public schools nationally. BIE schools' educational functions are primarily the responsibility of BIE, while their administrative functions are divided mainly between two other Interior offices. The Bureau of Indian Education develops educational policies and procedures, supervises program activities, and approves schools' expenditures. Three Associate Deputy Directors are responsible for overseeing multiple BIE local education offices that work directly with schools to provide technical assistance. Some BIE local offices also have their own facility managers. The Office of the Deputy Assistant Secretary of Management oversees many of BIE's administrative functions, including acquisitions and contract services, financial management, budget formulation, and property management. This office is also responsible for developing policies and procedures and providing technical assistance and funding to Bureau of Indian Affairs (BIA) regions and BIE schools to address their facility needs. Professional staff in this division--including engineers, architects, facility managers, and support personnel--are tasked with providing expertise in all facets of the facility management process. The Bureau of Indian Affairs administers a broad array of social services and other supports to tribes at the regional level. Regarding school facility management, BIA oversees the day-to-day implementation and administration of school facility construction and repair projects through its regional field offices. Currently there are 12 regional offices, and 9 of them have facility management responsibilities.health and safety inspections to ensure compliance with relevant These responsibilities include performing school requirements and providing technical assistance to BIE schools on facility issues. In September 2013, we reported that BIE student performance on national and state assessments and graduation rates were below those of Indian students in public schools. For example, in 2011, 4th grade estimated average reading scores were 22 points lower for BIE students than for Indian students in public schools. In 4th grade mathematics, BIE students scored 14 points lower, on average, than Indian students in public schools in 2011. (See fig. 2.) We also reported that 8th grade students in 2011 had consistently lower scores on average than Indian students in public schools. Furthermore, students in BIE schools had relatively low rates of graduation from high school compared to Indian students in public schools in the 2010-2011 school year. Specifically, the graduation rate for BIE students for that year was 61 percent--placing BIE students in the bottom half among graduation rates for Indian students in states where BIE schools are located. In these states, the Indian student graduation rates ranged from 42 to 82 percent. Indian Affairs' administration of BIE schools--which has undergone multiple realignments over the past 10 years--is fragmented. In addition to BIE, multiple offices within BIA and the Office of the Deputy Assistant Secretary of Management have responsibilities for educational and administrative functions for BIE schools. Notably, when the Assistant Secretary for Indian Affairs was asked at a February 2015 hearing to clarify the responsibilities that various offices have over BIE schools, he responded that the current structure is "a big part of the problem" and that the agency is currently in the process of realigning the responsibilities various entities have with regard to Indian education, adding that it is a challenging and evolving process. Indian Affairs provided us with a chart on offices with a role in supporting and overseeing just BIE school facilities, which shows numerous offices across three organizational divisions. (See fig. 3.) The administration of BIE schools has undergone several reorganizations over the years to address persistent concerns with operational effectiveness and efficiency. In our 2013 report, we noted that for a brief period from 2002 to 2003, BIE was responsible for its own administrative functions, according to BIE officials. However, in 2004 its administrative functions were centralized under the Office of the Deputy Assistant Secretary for Management. More recently, in 2013 Indian Affairs implemented a plan to decentralize some administrative responsibilities for schools, delegating certain functions to BIA regions. Further, in June 2014, the Secretary of the Interior issued an order to restructure BIE by the start of school year 2014-2015 to centralize the administration of schools, decentralize services to schools, and increase the capacity of tribes to directly operate them, among other goals. Currently, Indian Affairs' restructuring of BIE is ongoing. In our 2013 report, we found that the challenges associated with the fragmented administration of BIE schools were compounded by recurrent turnover in leadership over the years, including frequent changes in the tenure of acting and permanent assistant secretaries of Indian Affairs from 2000 through 2013. We also noted that frequent leadership changes may complicate efforts to improve student achievement and negatively affect an agency's ability to sustain focus on key initiatives. Indian Affairs' administration of BIE schools has also been undermined by the lack of a strategic plan for guiding its restructuring of BIE's administrative functions and carrying out BIE's mission to improve education for Indian students. We have previously found that key practices for organizational change suggest that effective implementation of a results-oriented framework, such as a strategic plan, requires agencies to clearly establish and communicate performance goals, measure progress toward those goals, determine strategies and resources to effectively accomplish the goals, and use performance information to make the decisions necessary to improve performance.We noted in our 2013 report that BIE officials said that developing a strategic plan would help its leadership and staff pursue goals and collaborate effectively to achieve them. Indian Affairs agreed with our recommendation to develop such a plan and recently reported it had taken steps to do so. However, the plan has yet to be finalized. Fragmented administration of schools may also contribute to delays in providing materials and services to schools. For example, our previous work found that the Office of the Deputy Assistant Secretary for Management's lack of knowledge about the schools' needs and expertise in relevant education laws and regulations resulted in critical delays in procuring and delivering school materials and supplies, such as textbooks. In another instance, we found that the Office of the Deputy Assistant Secretary for Management's processes led to an experienced speech therapist's contract being terminated at a BIE school in favor of a less expensive contract with another therapist. However, because the new therapist was located in a different state and could not travel to the school, the school was unable to fully implement students' individualized education programs in the timeframe required by the Individuals with Disabilities Education Act. In addition, although BIE accounted for approximately 34 percent of Indian Affairs' budget, several BIE officials reported that improving student performance was often overshadowed by other agency priorities, which hindered Indian Affairs' staff from seeking and acquiring expertise in education issues. In our 2013 report, we also found that poor communication among Indian Affairs offices and with schools about educational services and facilities undermines administration of BIE schools. According to school officials we interviewed, communication between Indian Affairs' leadership and BIE is weak, resulting in confusion about policies and procedures. We have reported that working relations between BIE and the Office of the Deputy Assistant Secretary for Management's leadership are informal and sporadic, and BIE officials noted having difficulty obtaining timely updates from the Office of the Deputy Assistant Secretary for Management on its responses to requests for services from schools. In addition, there is a lack of communication between Indian Affairs' leadership and schools. BIE and school officials in all four states we visited reported that they were unable to obtain definitive answers to policy or administrative questions from BIE's leadership in Washington, For example, school officials in one state D.C. and Albuquerque, NM.we visited reported that they requested information from BIE's Albuquerque office in the 2012-2013 school year about the amount of Individuals with Disabilities Education Act funds they were to receive. The Albuquerque office subsequently provided them three different dollar amounts. The school officials were eventually able to obtain the correct amount of funding from their local BIE office. Similarly, BIE and school officials in three states reported that they often do not receive responses from BIE's Washington, D.C. and Albuquerque offices to questions they pose via email or phone. Further, one BIE official stated that meetings with BIE leadership are venues for conveying information from management to the field, rather than opportunities for a two-way dialogue. We testified recently that poor communication has also led to confusion among some BIE schools about the roles and responsibilities of the various Indian Affairs' offices responsible for facility issues. For example, the offices involved in facility matters continue to change, due partly to two re-organizations of BIE, BIA, and the Office of the Deputy Assistant Secretary for Management over the past 2 years. BIE and tribal officials at some schools we visited said they were unclear about what office they should contact about facility problems or to elevate problems that are not addressed. At one school we visited, a BIE school facility manager submitted a request in February 2014 to replace a water heater so that students and staff would have hot water in the elementary school. However, the school did not designate this repair as an emergency. Therefore, BIA facility officials told us that they were not aware of this request until we brought it to their attention during our site visit in December 2014. Even after we did so, it took BIE and BIA officials over a month to approve the purchase of a new water heater, which cost about $7,500. As a result, students and staff at the elementary school went without hot water for about a year. We have observed difficulties in providing support for the most basic communications, such as the availability of up-to-date contact information for BIE and its schools. For example, BIE schools and BIA regions use an outdated national directory with contact information for BIE and school officials, which was last updated in 2011. This may impair communications, especially given significant turnover of BIE and school staff. It may also hamper the ability of schools and BIA officials to share timely information with one another about funding and repair priorities. In one BIA region we visited, officials have experienced difficulty reaching certain schools by email and sometimes rely on sending messages by fax to obtain schools' priorities for repairs. This situation is inconsistent with federal internal control standards that call for effective internal communication throughout an agency. In 2013, we recommended that Interior develop a communication strategy for BIE to update its schools and key stakeholders of critical developments. We also recommended that Interior include a communication strategy--as part of an overall strategic plan for BIE--to improve communication within Indian Affairs and between Indian Affairs and BIE staff. Indian Affairs agreed to these two recommendations and recently reported taking some steps to address them. However, it did not provide us with documentation that shows it has fully implemented the recommendations. Limited staff capacity poses another challenge to addressing BIE school needs. According to key principles of strategic workforce planning, the appropriate geographic and organizational deployment of employees can further support organizational goals and strategies and enable an organization to have the right people with the right skills in the right place. In 2013 we reported that staffing levels at BIA regional offices were not adjusted to meet the needs of BIE schools in regions with varying numbers of schools, ranging from 2 to 65. Therefore, we noted that it is important to ensure that each BIA regional office has an appropriate number of staff who are familiar with education laws and regulations and school-related needs to support the BIE schools in its region. Consequently, in 2013 we recommended that Indian Affairs revise its strategic workforce plan to ensure that its employees providing administrative support to BIE have the requisite knowledge and skills to help BIE achieve its mission and are placed in the appropriate offices to ensure that regions with a large number of schools have sufficient support. Indian Affairs agreed to implement the recommendation but has not yet done so. BIA regional offices also have limited staff capacity for addressing BIE school facility needs due to steady declines in staffing levels for over a decade, gaps in technical expertise, and limited institutional knowledge. For example, our preliminary analysis of Indian Affairs data shows that about 40 percent of BIA regional facility positions are currently vacant, including regional facility managers, architects, and engineers who typically serve as project managers for school construction and provide technical expertise. Our work and other studies have cited the lack of capacity of Indian Affairs' facility staff as a longstanding agency challenge. Further, officials at several schools we visited said they face similar staff capacity challenges. For example, at one elementary school we visited, the number of maintenance employees has decreased over the past decade from six employees to one full-time employee and a part- time assistant, according to school officials. As a result of the staffing declines, school officials said that facility maintenance staff may sometimes defer needed maintenance. Within BIE, we also found limited staff capacity in another area of school operations--oversight of school expenditures. As we reported in November 2014, the number of key local BIE officials monitoring these expenditures had decreased from 22 in 2011 to 13, due partly to budget cuts. These officials had many additional responsibilities for BIE schools similar to school district superintendents of public schools, such as providing academic guidance. As a result, the remaining 13 officials had an increased workload, making it challenging for them to effectively oversee schools. For example, we found that one BIE official in North Dakota was also serving in an acting capacity for an office in Tennessee and was responsible for overseeing and providing technical assistance to schools in five other states--Florida, Louisiana, Maine, Mississippi, and North Carolina. Further, we reported that the challenges that BIE officials confront in overseeing school expenditures are exacerbated by a lack of financial expertise and training. For example, although key local BIE officials are responsible for making important decisions about annual audit findings, such as whether school funds are being spent appropriately, they are not auditors or accountants. Additionally, as we reported in November 2014, some of these BIE officials had not received recent training on financial oversight. Without adequate staff and training, we reported that BIE will continue struggling to adequately monitor school expenses. Consequently, we recommended in 2014 that Indian Affairs develop a comprehensive workforce plan to ensure that BIE has an adequate number of staff with the requisite knowledge and skills to effectively oversee BIE school expenditures. Indian Affairs agreed with our recommendation but has not yet taken any action. Our work has shown that another management challenge, inconsistent accountability, hinders Indian Affairs in the areas of (1) managing school construction and (2) monitoring overall school expenditures. Specifically, this challenge hinders its ability to ensure that Indian students receive a quality education in a safe environment that is conducive to learning. In our February 2015 testimony on BIE school facilities, we reported that Indian Affairs had not provided consistent accountability on some recent school construction projects. According to agency and school officials we interviewed, some recent construction projects, including new roofs and buildings, went relatively well, while others faced numerous problems. The problems we found with construction projects at some schools suggest that Indian Affairs is not fully or consistently using management practices to ensure contractors perform as intended. For example, officials at three schools said they encountered leaks with roofs installed within the past 11 years. At one BIE-operated school we visited, Indian Affairs managed a project in which a contractor completed a $3.5 million project to replace roofs in 2010, but the roofs have leaked since their installation, according to agency documents. These leaks have led to mold in some classrooms and numerous ceiling tiles having to be removed throughout the school. (See fig. 4.) In 2011, this project was elevated to a senior official within Indian Affairs, who was responsible for facilities and construction. He stated that the situation was unacceptable and called for more forceful action by the agency. Despite numerous subsequent repairs of these roofs, school officials and regional Indian Affairs officials told us in late 2014 that the leaks and damage to the structure continue. They also said that they were not sure what further steps, if any, Indian Affairs would take to resolve the leaks or hold the contractors or suppliers accountable, such as filing legal claims against the contractor or supplier if appropriate. At another school we visited, construction problems included systems inside buildings as well as building materials. For example, in the cafeteria's kitchen at one BIE-operated school, a high voltage electrical panel was installed next to the dishwashing machine, which posed a potential electrocution hazard. School facility staff told us that although the building inspector and project manager for construction approved this configuration before the building opened, safety inspectors later noted that it was a safety hazard. (See fig 5.) In South Dakota, a school we visited recently encountered problems constructing a $1.5 million building for bus maintenance and storage using federal funds. According to Indian Affairs and school officials, although the project was nearly finished at the time of our visit in December 2014, Indian Affairs, the school, and the contractor still had not resolved various issues, including drainage and heating problems. Further, part of the new building for bus maintenance has one hydraulic lift, but the size of the building does not allow a large school bus to fit on the lift when the exterior door is closed because the building is not long enough. Thus, staff using the lift would need to maintain or repair a large bus with the door open, which is not practical in the cold South Dakota winters. (See fig. 6.) According to Indian Affairs officials, part of the difficulty with this federally- funded project resulted from the school's use of a contractor responsible for both the design and construction of the project, which limited Indian Affairs' ability to oversee it. Indian Affairs officials said that this arrangement, known as "design-build," may sometimes have advantages, such as faster project completion times, but may also give greater discretion to the contractor responsible for both the design and construction of the building. For example, Indian Affairs initially raised questions about the size of the building to store and maintain buses. However, agency officials noted that the contractor was not required to incorporate Indian Affairs' comments on the building's design or obtain its approval for the project's design, partly because Indian Affairs' policy does not appear to address approval of the design in a "design-build" project. Further, neither the school nor Indian Affairs used particular financial incentives to ensure satisfactory performance by the contractor. Specifically, the school already paid the firm nearly the full amount of the project before final completion according to school officials, leaving it little financial leverage over the contractor. We will continue to monitor such issues as we complete our ongoing work on BIE school facilities and consider any recommendations that may be needed to address these issues. In our 2014 report on BIE school spending, we found that BIE's oversight did not ensure that school funds were spent appropriately on educational services, although external auditors had determined that there were serious financial management issues at some schools. Specifically, auditors identified $13.8 million in unallowable spending by 24 BIE schools as of July 2014. Additionally, in one case, an annual audit found that a school lost about $1.2 million in federal funds that were illegally transferred to an offshore bank account. The same school had accumulated at least another $6 million in federal funds in a U.S. bank account. As of June 2014, BIE had not determined how the school accrued that much in unspent federal funds. Further, instead of using a risk-based approach to its monitoring efforts, BIE indicated that it relies primarily on ad hoc suggestions by staff regarding which schools to target for greater oversight. For example, BIE failed to increase its oversight of expenditures at one school where auditors found that the school's financial statements had to be adjusted by about $1.9 million and found unreliable accounting of federal funds during a 3-year period we reviewed. We recommended that Indian Affairs develop a risk-based approach to oversee school expenditures to focus BIE's monitoring activities on schools that auditors have found to be at the greatest risk of misusing federal funds. However, Indian Affairs agreed but has not yet implemented this recommendation. In addition, we found that BIE did not use certain tools to monitor school expenditures. For example, BIE did not have written procedures to oversee schools' use of Indian School Equalization Program funds, which accounted for almost half of their total operating funding in fiscal year 2014. In 2014, we recommended that Indian Affairs develop written procedures, including for Interior's Indian School Equalization Program, to consistently document their monitoring activities and actions they have taken to resolve financial weaknesses identified at schools. While Indian Affairs generally agreed, it has not yet taken this action. Without a risk- based approach and written procedures to overseeing school spending-- both integral to federal internal control standards--there is little assurance that federal funds are being used for their intended purpose to provide BIE students with needed instructional and other educational services. In conclusion, Indian Affairs has been hampered by systemic management challenges related to BIE's programs and operations that undermine its mission to provide Indian students with quality education opportunities and safe environments that are conducive to learning. In light of these management challenges, we have recommended several improvements to Indian Affairs on its management of BIE schools. While Indian Affairs has generally agreed with these recommendations and reported taking some steps to address them, it has not yet fully implemented them. Unless steps are promptly taken to address these challenges to Indian education, it will be difficult for Indian Affairs to ensure the long-term success of a generation of students. We will continue to monitor these issues as we complete our ongoing work and consider any additional recommendations that may be needed to address these issues. Chairman Rokita, Ranking Member Fudge, and Members of the Subcommittee, this concludes my prepared statement. I will be pleased to answer any questions that you may have. For future contact regarding this testimony, please contact Melissa Emrey-Arras at (617) 788-0534 or [email protected]. Key contributors to this testimony were Elizabeth Sirois (Assistant Director), Edward Bodine, Matthew Saradjian, and Ashanta Williams. Also, providing legal or technical assistance were James Bennett, David Chrisinger, Jean McSween, Jon Melhus, Sheila McCoy, and James Rebbe. 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.

BIE is responsible for providing quality education opportunities to Indian students. It currently oversees 185 schools, serving about 41,000 students on or near Indian reservations. Poor student outcomes raise questions about how well BIE is achieving its mission. In September 2013, GAO reported that BIE student performance has been consistently below that of Indian students in public schools. This testimony discusses Indian Affairs' management challenges in improving Indian education, including (1) its administration of schools, (2) staff capacity to address schools' needs, and 3) accountability for managing school construction and monitoring school spending. This testimony is based on GAO reports issued in September 2013 and November 2014, as well as GAO's February 2015 testimony, which presents preliminary results from its ongoing review of BIE school facilities. A full report on school facilities will be issued later this year. GAO reviewed relevant laws and regulations; analyzed agency data; and conducted site visits to schools, which were selected based on their geographic diversity and other factors. GAO has made several recommendations in its earlier reports; it is not making any new recommendations in this statement. GAO has reported for several years on how systemic management challenges within the Department of the Interior's Office of the Assistant Secretary-Indian Affairs (Indian Affairs) continue to hamper efforts to improve Bureau of Indian Education (BIE) schools. Over the past 10 years, Indian Affairs has undergone several organizational realignments, resulting in multiple offices across different units being responsible for BIE schools' education and administrative functions. Indian Affairs' fragmented organization has been compounded by frequent turnover in its leadership over a 13-year period and its lack of a strategic plan for BIE. Further, fragmentation and poor communication among Indian Affairs offices has led to confusion among schools about whom to contact about problems, as well as delays in the delivery of key educational services and supplies, such as textbooks. Key practices for organizational change suggest that agencies develop a results-oriented framework, such as a strategic plan, to clearly establish and communicate performance goals and measure their progress toward them. In 2013, GAO recommended that Interior develop a strategic plan for BIE and a strategy for communicating with schools, among other recommendations. Indian Affairs agreed with and reported taking some steps to address the two recommendations. However, it has not fully implemented them. Limited staff capacity poses another challenge to addressing BIE school needs. According to key principles for effective workforce planning, the appropriate deployment of employees enables organizations to have the right people, with the right skills, in the right place. However, Indian Affairs data indicate that about 40 percent of its regional facility positions, such as architects and engineers, are vacant. Similarly, in 2014, GAO reported that BIE had many vacancies in positions to oversee school spending. Further, remaining staff had limited financial expertise and training. Without adequate staff and training, Indian Affairs will continue to struggle in monitoring and supporting schools. GAO recommended that Interior revise its workforce plan so that employees are placed in the appropriate offices and have the requisite knowledge and skills to better support schools. Although Indian Affairs agreed with this recommendation, it has not yet implemented it. Inconsistent accountability hampers management of BIE school construction and monitoring of school spending. Specifically, GAO has found that Indian Affairs did not consistently oversee some construction projects. For example, at one school GAO visited, Indian Affairs spent $3.5 million to replace multiple roofs in 2010. The new roofs already leak, causing mold and ceiling damage, and Indian Affairs has not yet adequately addressed the problems, resulting in continued leaks and damage to the structure. Inconsistent accountability also impairs BIE's monitoring of school spending. In 2014, GAO found that BIE does not adequately monitor school expenditures using written procedures or a risk-based monitoring approach, contrary to federal internal control standards. As a result, BIE failed to provide effective oversight of schools when they misspent millions of dollars in federal funds. GAO recommended that the agency develop written procedures and a risk-based approach to improve its monitoring. Indian Affairs agreed but has yet to implement these recommendations.

In response to various attacks, State has continually assessed and updated its security standards and physical security measures at posts around the world. After the 1998 embassy bombings in Nairobi, Kenya, and Dar es Salaam, Tanzania, State initiated the Capital Security Construction program (also referred to as the New Embassy Compound program), a multiyear effort to replace approximately 200 facilities with new facilities that meet State's updated security standards. As of the end of fiscal year 2007, State had obligated more than $5.9 billion for this program, awarded contracts for the construction of 78 new embassy and consulate compounds, and completed more than 50 new facilities. State currently plans to contract for 80 more new facilities through 2014. To complement its efforts to move overseas U.S. government employees into more secure facilities, State initiated efforts to enhance physical security at existing facilities. After the 1998 embassy bombings, State initiated a new physical security upgrades program called the World-Wide Security Upgrade Program, which focused on enhancing perimeter security measures. In response to the September 11 terrorist attacks, State focused on ensuring that embassies and consulates had adequate safe areas for staff in case of an attack on the facilities. Since 2004, State has taken a more comprehensive approach to physical security upgrades by reviewing the entire range of physical security needs at posts through CSUP. State has identified the following four goals for CSUP: to provide physical security protection to the extent practical for existing facilities; to provide physical security upgrades to meet current security standards for those facilities that will not be replaced by a NEC in the near-term; to initiate physical security upgrades at facilities that are not part of the chancery compound, including annexes, public diplomacy facilities, and warehouses; and to provide security upgrades to nongovernmental facilities ("soft targets") frequented by U.S. citizens. From fiscal year 1999 through 2007, State had obligated more than $1.2 billion for security upgrades. Since fiscal year 2004 and the initiation of CSUP, OBO has undertaken approximately 55 major projects costing over $1 million that enhance physical security at posts that are not going to be replaced with a new facility in the near future, if at all. OBO's Long-Range Overseas Buildings Plan calls for it to undertake an average of 13 major CSUP projects per year through 2012. CSUP provides several categories of security upgrades to help posts meet physical security standards, such as perimeter security measures (including anti-climb walls, fences, compound access control facilities, bollards, cameras, and security lighting); forced entry/ballistic resistant doors and windows; safe areas for U.S. personnel in case of emergency; and stand-alone mail screening facilities. In addition, OBO has obligated approximately $58 million per year of CSUP funds for minor post-managed security upgrade projects, such as minor residential security upgrades, maintenance, repair, and replacement of existing forced entry/ballistic resistant doors and windows, and modular mail screening facilities. The Overseas Security Policy Board, which includes representatives from more than 20 U.S. intelligence, foreign affairs, and other agencies, is responsible for considering, developing, and promoting security policies and standards that affect U.S. government agencies under the authority of the Chief of Mission at a post. This responsibility includes reviewing and issuing uniform guidance on physical security standards for embassies, consulates, and other overseas office space. State incorporates the board's physical security standards in its "Foreign Affairs Handbook" and "Foreign Affairs Manual." With respect to existing office buildings, the standards apply to the maximum extent feasible or practicable. State has identified five key Overseas Security Policy Board standards to protect overseas diplomatic office facilities against terrorism and other dangers (see fig. 1). First, the Secure Embassy Construction and Counterterrorism Act of 1999 requires that office facilities be at least 100 feet from uncontrolled areas, such as a street where vehicles can pass without being checked by security officials. This distance is meant to help protect the buildings and occupants against threats such as bomb blasts. Second, State requires high perimeter walls or fences that are difficult to climb, thereby deterring those who might attack the compound on foot. Third, State requires anti- ram barriers to ensure that vehicles cannot breach the facility perimeter to get close to the building and detonate a bomb. The fourth standard requires blast-resistant construction techniques and materials. These materials include reinforced concrete and steel construction and blast- resistant windows. Coupled with a 100-foot setback, blast-resistant construction provides the best possible protection against vehicle bomb attack, according to DS officials. State's fifth security standard is controlled access of pedestrians and vehicles at the perimeter of a compound. Compound access control facilities allow guards to screen personnel and visitors before they enter the compound to verify that they have legitimate business at the embassy or consulate and that they bring nothing onto the compound that could be potentially harmful or used to surreptitiously gather intelligence. Similarly, the facilities allow guards to search vehicles before they are permitted to enter the compound. OBO has a threat- and vulnerability-based planning process for its CSUP projects that includes input from DS's analysis of security threats and vulnerabilities and from post officials. The DS analysis currently focuses on embassy and consulate compounds, though DS is developing a risk- based prioritization process that considers the number of personnel, threats, and vulnerabilities at each facility, including off-compound facilities. OBO has improved its process for developing projects by conducting more comprehensive needs assessments of posts, including off-compound facilities, early in the design phase. OBO prioritizes which posts will receive upgrades based in part on assessments from DS of the physical security conditions and threat levels at each post. Each year, DS ranks all 262 posts based on their threat levels and vulnerabilities. With input from posts' security officers and the intelligence community, DS determines the threat level for terrorism and political violence. DS also determines the vulnerabilities of each post in several categories, including protection from chemical and biological attack, seismic and blast resistance, the strength of the construction and facade, and the amount of setback. Once these determinations are made, DS ranks the posts. The resulting list of rankings is used by OBO and other stakeholders to plan NEC projects. For CSUP planning, posts that are scheduled for an NEC project within the next 2 to 3 years are removed from the list, and DS and OBO reevaluate the list, factoring in the number of people at post, to create a priority list for CSUP projects. OBO then modifies the list to balance various factors. First, OBO removes facilities that cannot be further upgraded, such as many leased facilities. Second, OBO adds facilities that may have been removed, such as vulnerable off-compound facilities at posts where NEC projects are planned. Third, OBO has security engineers conduct a thorough assessment of each post's needs. Fourth, OBO alters the list to account for external factors, such as difficulty getting a host government's approval on a project, which would move a project down the list. Finally, OBO develops its 6-year list of CSUP projects based on expected funds and places these projects in the Long-Range Overseas Buildings Plan. If OBO experiences budget constraints, it will delay projects--moving future projects to subsequent fiscal years--rather than reduce their scope, according to State officials. Once a project is placed on the Long-Range Overseas Buildings Plan, an OBO team undertakes an assessment visit to the post to determine what the project should include. OBO consults with DS and the post and reviews Office of Inspector General security inspections in order to determine the scope of the project. One year prior to a project's start date, OBO then develops an initial planning survey in which OBO seeks agreement between its engineers and the post's Regional Security Officer. The initial planning survey is then sent in draft form for approval by OBO and post officials, including the Regional Security Officer, administrative officer, and facilities manager. Once this process is completed, OBO works with its contract design firm to develop conceptual design plans. State's contracting offices use these plans to advertise for bids to complete the design and construct the improvements using a design-build contract. After a firm has been awarded the contract, it will develop and submit interim and then final plans for OBO's review. OBO consults with post officials, including the Regional Security Officer, in reviewing the designs to help ensure that proposed upgrades meet each post's security needs before giving the firm authorization to proceed with construction. According to OBO and DS officials, the DS physical security assessment is currently based on the physical security needs of each post's main compound but does not factor in the security of facilities located outside the main embassy or consulate compound, even though hundreds of such facilities exist. We noted that, in several cases, these off-compound facilities lacked required physical security measures. For example, we found that one post compound, following the conclusion of its CSUP project, met most security standards, but a nearby off-compound office facility did not have setback, blast-resistant walls and windows, a controlled access facility for pedestrians and vehicles, a safe area, and other security features. OBO and DS are currently working to better address the needs of all facilities, including the hundreds of annexes located off compound, and improve CSUP project prioritization. OBO officials commented that newer projects take into account the needs of all facilities at a post, whether they are on compound or not. For example, at one post we visited, we saw a CSUP project for an off-compound office facility. Moreover, DS is developing a new risk-based process to prioritize CSUP projects that will rate the vulnerabilities of each overseas building with office space, including annexes, and factor in the number of personnel and threat levels to better set priorities. According to a DS official, the formula needs to be validated and, if successful, staff needs to be trained on its use before beginning implementation. State expects to complete these steps by March 2008. OBO is taking additional steps to more comprehensively address post security needs and improve CSUP planning processes. According to OBO, CSUP initially focused on perimeter security, but as new standards have been put in place and perimeter projects completed, the program has broadened its focus to ensure that posts meet all physical security standards to the extent feasible. For example, in 2004, terrorists rushed on foot past the barriers blocking a car being inspected at the vehicular gate of the consulate in Jeddah, Saudi Arabia. In response, State began to install additional fencing and a secondary gate, called a man trap, at vehicle entry points at posts to prevent attackers on foot from accessing the compounds. Moreover, the Overseas Security Policy Board is currently considering the addition of a new security standard requiring man traps. In addition, OBO officials noted that they meet monthly to improve processes for project planning and execution, including those involving CSUP. One result of these meetings has been a decision to conduct OBO's initial planning surveys earlier in the design process to gain a better understanding of post's security needs. Another result of these meetings is that OBO created a more comprehensive survey instrument to better identify all vulnerabilities at the post for consideration in the CSUP project. While most CSUP projects we reviewed have been completed within their contractual time frames and costs, OBO found it necessary to modify all but one of the contracts to extend project time frames, adjust costs, or both. Since the beginning of fiscal year 2004, OBO has contracted for 47 projects valued at $1 million or more that were subsequently completed by September 30, 2007. In reviewing schedule performance data, we found that 96 percent of projects were completed within 30 days of their contractual completion date (see fig. 2). However, we found that OBO modified the contracts to extend their completion dates for 81 percent of the projects. On average, OBO extended the contracts by 4 months--an average increase of 26 percent. Many of these extensions did not result in increased costs to the government. For each of the 47 projects, OBO paid the contractor the amount specified in the fixed-price contracts--an average project cost of $2.6 million. In reviewing cost data, we found that OBO increased the contract cost for 34 projects, at an average increase of 17 percent, and decreased the contract cost for 11 projects, at an average decrease of 5 percent (see fig. 2). The net change in the cost of the 47 projects was an increase of $10 million. Cost increases were generally due to changes in the scope of the projects, while cost decreases were generally due to a reduction in expected local tax costs. Our past assessments of domestic government renovation projects found that work on existing facilities presented a number of difficulties and challenges, making renovations especially susceptible to cost increases stemming from unexpected conditions. We found that, for such projects, government agencies generally budget 5 to 15 percent of project cost for unexpected changes. OBO cited factors outside the contractor's control as the cause of most of the delays and cost increases, such as unusually lengthy local permitting processes, previously unidentified underground utilities that needed to be moved, design changes that OBO made during construction work, and project changes requested by the post. For example, OBO extended the deadline 10 months for completion of perimeter fencing upgrades and a new CAC facility at a U.S. consulate in Asia because of delays in receiving approval from local authorities to proceed with the work. In addition, in response to a request from officials at a U.S. embassy in Europe, OBO added to the scope of the planned CSUP project, including a new CAC facility, and modified the contract to pay the contractor an additional $874,000 for the added work. However, in cases where OBO found that contractor error was the cause of a delay or cost increase, OBO held the contractor accountable. For example, at a U.S. mission in Europe, OBO found instances where the contractor's work did not conform to contract specifications and required the contractor to redo the work. OBO did not compensate the contractor for the additional costs associated with replacing the substandard work. Similarly, at a U.S. consulate in Europe, the contractor was more than 6 months late in completing the security upgrades; OBO, therefore, assessed the contractor a penalty of almost $60,000. OBO has project management procedures to help ensure the security upgrades it contracted for are completed and have enhanced posts' compliance with physical security standards. For each CSUP project, OBO assigns a project manager who is responsible for the effective completion of the project. However, because CSUP projects are generally small and OBO has limited resources, project managers are not usually able to be on site full time during the project. Project managers visit posts to ensure the work contracted for is being done and, in many cases, rely on post officials, including the Regional Security Officers and facility managers, to provide additional monitoring of the work. In our visits to 11 posts, we found that, in most cases, the work called for in the projects had been done or was under way. However, at one location, we found that one component of the project--strengthening the room where the post's emergency generator is located--was removed from the scope of the project because, according to post officials, it would have unexpectedly required creating new office space to relocate people during the work, adding costs that could not be covered by the CSUP budget. OBO decided to remove this work from the scope of the project and initiate a new project in the future to address this physical security need. Completed CSUP projects have achieved their objective of enhancing the security at posts by bringing posts in better compliance with security standards. Major CSUP projects have enhanced physical security at 47 embassies and consulates since fiscal year 2004, and OBO currently expects to complete all major CSUP projects, barring extensive changes to current security standards or expected funding, by 2018. CSUP security enhancements have encompassed constructing compound access control facilities at the perimeter of the compounds at 25 posts (see fig. 3 for an example); building safe areas for post officials in case of attack at 25 posts; improving compound walls, fencing, and barriers at 22 posts (see fig. 4 for examples); and strengthening the interior walls and doors that create a "hard line" that separates American staff from visitors at 8 posts. At the 11 posts we visited with ongoing or completed CSUP projects, we found that the projects had enhanced posts' compliance with State's physical security standards as detailed in the "Foreign Affairs Handbook" and "Foreign Affairs Manual." The projects we viewed added or enhanced pedestrian and vehicle access points, replaced perimeter fencing to meet anti-climb requirements, installed bollards and barriers at key points to meet anti-ram requirements, built safe areas for post officials in case of attack, enhanced the hard line separating post employees from visitors, and installed forced entry/ballistic-resistant windows and doors. Nevertheless, without building a new facility, many posts are unable to meet all security standards for a variety of reasons beyond the scope of CSUP. We found that none of the posts we visited adhered fully with current security standards because of conditions that were outside the scope of CSUP projects. For example, most of the posts we visited were located in dense urban areas that prevented them from achieving a 100- foot setback from the street, one of the key security standards (see fig. 5 for an example). OBO and DS officials acknowledged that, at many locations, it is not feasible to increase the setback by acquiring land and closing off nearby streets. In other cases, officials stated the buildings themselves were not structurally capable of handling heavy forced entry/ballistic-resistant windows or other upgrades. And in other cases, officials commented that host nations or cities would not allow certain upgrades to be implemented, such as removing trees to create a clear zone around the embassy or changing the facade of historic buildings. Finally, current plans for the NEC program do not include the replacement of 61 of 262 embassies and consulates. Several of these facilities were built after physical security standards were strengthened in response to terrorist attacks against U.S. facilities in Beirut, Lebanon, in the 1980s. State officials acknowledged that other facilities may not be replaced due to cost and political concerns. As a result, many buildings and their occupants may remain vulnerable to attack. The Department of State provided written comments on a draft of this report, which are reproduced in appendix II. State agreed with our findings, noting that the report accurately describes State's CSUP efforts. State also provided us with technical suggestions and clarifications that we have addressed in this report, as appropriate. 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 interested Members of Congress and the Secretary of State. We also 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 staff have any questions about this report, please contact Charles Michael Johnson, Jr., at (202) 512-7331 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 III. To discuss the factors that the Bureau of Overseas Buildings Operations (OBO) considers as it plans and prioritizes Compound Security Upgrades Program (CSUP) projects, we reviewed Department of State (State) prioritization and planning documents concerning the assignment of post threat levels, assessments of the security vulnerabilities of posts, and CSUP. We discussed CSUP prioritization and planning, as well as changes to those processes in response to recent attacks, with officials from OBO and State's Bureau of Diplomatic Security (DS) in Washington, D.C, and overseas, including post officials, including Deputy Chiefs of Mission, Regional Security Officers, facilities managers, and General Services Officers, and with contractors overseas. In addition, we reviewed past GAO audit work on related issues. (See Related GAO Products at the end of this report.) To help confirm the accuracy of our analysis, we discussed our findings with State personnel involved in CSUP. To assess the extent to which CSUP projects met cost and schedule projections, we analyzed data that OBO provided specifically for the purposes of our review. Our scope included all 47 projects contracted since fiscal year 2004, completed by the end of fiscal year 2007, and valued at $1 million or more and, therefore, excluded smaller projects such as those designed to enhance the security of schools and other non-U.S. government properties frequented by U.S. personnel and their dependents. For each CSUP project, OBO provided data on the originally contracted completion date and cost, the modifications to the contracted completion date and cost, and the actual date of substantial completion and final contract cost for completed projects. We reviewed contracting documents to verify that the data were sufficiently reliable for the purposes of this report. To assess the extent to which CSUP projects included the security upgrades called for in the contract, we reviewed OBO's project management procedures. We interviewed project managers in Washington, D.C., and facilities managers, administrative officers, and regional security officers at 11 posts to verify the role and responsibilities of the project managers. We also inspected the ongoing or completed CSUP work at these posts to verify that the projects encompassed all of the security upgrades called for under the contract. To review the extent to which State's CSUP efforts have enhanced posts' ability to comply with State's physical security standards, we reviewed the project authorization memoranda, contract modifications, and OBO summary document on each of the 47 CSUP projects. These documents allowed us to identify the type of physical security upgrades that were installed at all 47 facilities. We discussed over 50 completed, ongoing, and planned projects with OBO officials. To confirm our initial findings, we traveled to 11 posts in Latin America, Europe, and the Middle East that had recently completed or ongoing CSUP projects. We selected these countries to ensure regional coverage, a range of project types, and a mix of ongoing and completed projects; however, as this was not a generalizeable sample, our findings do not necessarily apply to all posts. We are not naming the specific countries we visited for this review due to security concerns. We developed a physical security needs checklist based upon State's "Foreign Affairs Handbook," "Foreign Affairs Manual," and OBO's own needs assessment documentation. We applied our checklist consistently at all 11 posts. Our checklist did not, however, attempt to assess State's procedures for utilizing physical security upgrades. For example, the checklist did not assess whether posts use new CACs properly to screen vehicles or people. At each post, we conducted a review of the security needs and received briefings on the recently completed, ongoing, or planned CSUP projects. We met with relevant post personnel, including Deputy Chiefs of Mission, Regional Security Officers, facilities managers, and General Services Officers, as well as contractors to discuss the physical security needs at post, CSUP project management and implementation, and post-specific limitations to receiving certain physical security upgrades. We conducted this performance audit from November 2006 through 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 based on our audit objectives. We believe that the evidence obtained provides a reasonable basis for our findings based on our audit objectives. In addition the individual named above, David C. Maurer, Assistant Director; Michael J. Courts, Assistant Director; Valerie L. Nowak; Thomas M. Costa; Martin H. de Alteriis; Michael W. Armes; Leslie K. Locke; Ramon J. Rodriguez; Joseph P. Carney; Ian A. Ferguson; Etana Finkler; and Jason L. Bair made key contributions to this report. Embassy Construction: State Has Made Progress Constructing New Embassies, but Better Planning Is Needed for Operations and Maintenance Requirements. GAO-06-641. Washington, D.C.: June 30, 2006. Overseas Security: State Department Has Not Fully Implemented Key Measures to Protect U.S. Officials from Terrorist Attacks Outside of Embassies. GAO-05-688T. Washington, D.C.: May 10, 2005. Overseas Security: State Department Has Not Fully Implemented Key Measures to Protect U.S. Officials from Terrorist Attacks Outside of Embassies. GAO-05-642. Washington, D.C.: May 9, 2005. Embassy Construction: Achieving Concurrent Construction Would Help Reduce Costs and Meet Security Goals. GAO-04-952. Washington, D.C.: September 28, 2004. Embassy Construction: State Department Has Implemented Management Reforms, but Challenges Remain. GAO-04-100. Washington, D.C.: November 4, 2003. Overseas Presence: Conditions of Overseas Diplomatic Facilities. GAO- 03-557T. Washington, D.C.: March 20, 2003. Embassy Construction: Better Long-Term Planning Will Enhance Program Decision-making. GAO-01-11. Washington, D.C.: January 22, 2001. State Department: Overseas Emergency Security Program Progressing, but Costs Are Increasing. GAO/NSIAD-00-83. Washington, D.C.: March 8, 2000.

Following the 1998 embassy bombings, the Department of State (State) determined that more than 85 percent of diplomatic facilities did not meet security standards and were vulnerable to terrorist attacks. State's Bureau of Overseas Buildings Operations (OBO) has undertaken a program to replace or upgrade the security of these facilities. As of 2007, OBO had constructed more than 50 new embassies and moved nearly 15,000 staff to safer facilities. However, most remaining facilities will not be replaced in the near term. To address these facilities, OBO has obligated about $140 million per year for its Compound Security Upgrade Program (CSUP). GAO was asked to (1) describe the process that OBO follows to prioritize and plan CSUP projects, including stakeholder involvement; (2) determine the extent to which CSUP projects met contracted cost and time frames and whether OBO has procedures to ensure security upgrades are installed; and (3) assess whether State's CSUP efforts have enhanced posts' abilities to comply with State's physical security standards. To address these objectives, GAO reviewed pertinent State documents, met with State officials in Washington, D.C., and overseas, and traveled to 11 posts in Latin America, Europe, and the Middle East. State provided written comments on a draft of this report and agreed with our findings. OBO has a threat- and vulnerability-based process for prioritizing which posts receive CSUP projects and a planning process that utilizes input from State's Bureau of Diplomatic Security (DS) and post officials. DS assessments are currently based on physical security of each post's main compound, although many posts have facilities located outside the compound. DS is developing a prioritization process that will factor in the number of personnel, threat levels, and vulnerabilities at each facility, including those off compound. OBO has improved its planning processes by conducting a comprehensive survey of posts' physical security needs, including off-compound facilities. GAO found that 96 percent of 47 projects undertaken since fiscal year 2004 were completed within 30 days of their contractual completion date. However, OBO modified 81 percent of the contracts to extend their completion dates. GAO also found that while OBO paid the contractors the amount specified in the contracts, contract modifications resulted in cost adjustments to all but two contracts, which GAO found in prior work is not uncommon in government renovation projects. OBO cited factors outside the contractors' control as the cause of most delays and cost increases, such as lengthy local permitting issues. To help ensure security upgrades contracted for are completed, OBO assigns a project manager who is responsible for the project's completion and relies on regional and post officials to provide additional monitoring. CSUP projects have enhanced posts' compliance with physical security standards by constructing compound access control facilities, safe areas for post personnel, and compound walls and barriers. However, at the 11 posts GAO visited, site conditions prevented them from adhering fully with standards. For example, more than one post's urban location prevented it from achieving a 100-foot setback from the street, a key security standard. As a result, many buildings and their occupants may remain vulnerable to attack.

The December 26, 2004, earthquake and tsunami in the Indian Ocean near Indonesia left more than 200,000 dead and 40,000 reported missing and caused an estimated $10 billion in damages to property and infrastructure such as buildings, roads, and bridges. The Indonesian province of Aceh, about 150 miles from the epicenter of the earthquake, experienced the heaviest loss of lives and damage to property and infrastructure, largely along the west coast. Figure 1 shows the tsunami- affected countries; numbers of dead, missing, and displaced persons; and estimated damage. In Indonesia, the affected infrastructure included a major road and numerous bridges along the west coast--a key transportation artery in the region--that was destroyed in many locations and severely damaged in many others. Figure 2 shows two of the destroyed road sections in December 2005, 1 year after the tsunami. We began monitoring USAID's delivery of assistance to the tsunami- affected countries, including its reconstruction of the Indonesian coastal road, in May 2005, and issued reports on our work in 2006 and 2007. In April 2006, we reported that USAID planned to construct and rehabilitate 150 miles of paved road between Banda Aceh and Meulaboh at an estimated cost of $245 million, or $1.6 million per mile, with an estimated completion date of September 2009. We noted that the initial plans and cost estimates for rehabilitating and constructing the road were based on limited site information because much of the road's planned route was inaccessible. We also reported that costs and schedules for the road construction project might exceed initial estimates owing to several factors, including growing costs for materials and labor, long-standing civil conflict in the region, and difficulties that the Indonesian government might encounter in acquiring land parcels needed for the road right-of-way. The Japanese government agreed to rehabilitate the coastal road from Calang to Meulaboh. activities. In 2005 USAID allocated $245 million of this amount for the coastal road, and in 2006 USAID increased its allocation to $254 million. USAID reported that the final estimated cost, as of July 2012, was $256 million, or $2.8 million per mile. Figure 3 shows USAID's initial and revised plans and completed results for the Indonesia coastal road. From August 2005 to September 2010, USAID awarded five contracts to reconstruct the coastal road in Aceh Province, Indonesia--three contracts for construction, one contract for design and supervision, and one contract for project management. Factors related to contractor performance as well as local conditions delayed USAID's progress in designing and constructing the road and led to increased costs. Construction of the 91 miles of road completed in April 2012 took place under two contracts--designated by USAID as the "priority" and "prime" contracts--for a combined estimated 83 miles of the road, and under a third "8-mile" contract for the remaining 8 miles. USAID also awarded two additional contracts for, respectively, the design and supervision of the road construction and the management of the project. Priority construction contract. In August 2005, USAID awarded a contract to an Indonesia firm, PT Wijaya Karya (WIKA).initially expected to take place from August 2005 to August 2006, WIKA's construction work did not begin until October 2006. To expedite construction on certain "priority" sections of the road, USAID modified the contract to include, among other things, expanding the scope from 3 miles to 26 miles and extending the completion date from August 2006 to December 2007 for the 26 miles. In May 2008, USAID partially terminated the priority contract, removing 8 miles from the contract's scope. Design and supervision contract. In November 2005, USAID awarded a contract to Parsons Global Services (Parsons), a U.S.- based multinational engineering firm, to design most of the road sections--about 88 miles--and supervise construction of 91 miles of road work. Project management contract. In April 2006, approximately 6 months after hiring its design and supervision contractor, USAID hired a U.S.-registered professional engineer as its overall Project Managerto the Project Manager. The Project Manager served as the project's chief technical officer; was USAID's principal interface with Indonesian government officials; advised in the development of the project's design and, to ensure its conformance with design specifications, inspected construction work and directed changes as required prior to road sections being turned over to the Indonesian government. for the road construction project. Parsons reported directly Prime construction contract. In June 2007, USAID awarded the prime contract to SsangYong-Hutama Karya Joint Association (SsangYong-Hutama), a collaboration between a Korean firm and an Indonesian firm, for 65 miles of road construction in five noncontiguous sections. USAID had expected to award the prime construction contract in September 2006. However, its initial solicitation was restricted under USAID policy to U.S. firms, and USAID received only a single proposal, which the agency was unable to negotiate to an acceptable price. issued a second solicitation that, in an approved deviation from USAID policy, was opened to international firms. According to USAID officials, the second solicitation attracted interest from several prospective offerors and included a revised estimated completion date of March 2010, 6 months later than originally planned. In December 2006, USAID Eight-mile construction contract. In September 2010, USAID awarded a third construction contract to SsangYong Engineering & Construction (SsangYong) for the 8 contiguous miles removed from the priority contract, which was completed in January 2012. Table 1 shows the five major contracts that USAID awarded for the construction, design and supervision, and overall project management of the 91-mile road, as well as the contractors' completed activities. USAID originally intended that the "prime" contract would be used to construct the majority of the originally planned 150-mile road. However, the inability to award the contract based on the initial solicitation caused USAID to both increase the scope of construction under the "priority" contract to 26 miles and reduce the scope of construction under the "prime" contract to 65 miles, reflecting the revised project goal of building a 91- mile road. Legend: N/A = not applicable. WIKA designed the initial 3-mile "priority" road section; Parsons designed the remaining 88-mile road sections. Figure 4 shows road sections, key features, and funding levels for each of the three road construction contractors. Figure 5 shows a timeline of events related to the five contracts. Factors related to contractors' performance delayed USAID's progress in designing and constructing the road and led to increased costs. Priority construction contractor. Lack of acceptable progress by the priority contractor resulted in USAID's reducing the scope of the work, partially terminating the contract, and hiring a third construction contractor to complete the unfinished work. According to USAID, the mission determined that WIKA was not making satisfactory progress, owing in part to financial constraints and lack of equipment as well as WIKA's changing its project leader three times. WIKA's limited progress was primarily evident in one of the sections that comprised the priority contract. By May 2008, this 8-mile section was about 20 percent complete compared with other sections that were approximately 50 percent to 90 percent complete. Work in this section lagged in all areas of production including earthwork, concrete placement, and bridge and culvert construction. As a result, USAID eliminated this section from the scope of the priority contract through a termination action. USAID's decision to eliminate this section from the priority contract enabled WIKA to concentrate resources on remaining sections and continue making progress. USAID later awarded the 8-mile section to another contractor, SsangYong. However, because of the lengthy processes involved in terminating its contract with WIKA and procuring a new contract, USAID did not award its contract with SsangYong until September 2010. Prime construction contractor. Slower-than-expected progress, as well as the correction of work that did not comply with specifications, contributed to delays in the prime contractor's completion of the 65 miles of road construction. In addition, SsangYong-Hutama's project leader was changed five times, according to USAID, which may also have contributed to the contractor's repeatedly missing key schedule milestones. In addition, several local factors affected construction progress and costs. Delays in land acquisition. According to USAID, the Indonesian government had difficulty acquiring over 4,000 parcels of land needed for the new road alignment and right-of-way. The land was needed because, in many areas, the tsunami had changed the entire landscape such that parts of the road alignment, as it existed prior to the tsunami, were now underwater or otherwise inaccessible or unusable. In its efforts to acquire the land parcels, the Indonesian government experienced delays in determining ownership and locating owners because many owners had died in the tsunami. Also, in some instances, ownership documents, which were the only existing ownership records, were destroyed by the tsunami. Delays also occurred because, in some instances, the land parcels that were acquired were not contiguous and, as a result, construction contractors did not have a sufficient amount of land on which to initiate construction and store equipment and materials. For example, initiation of work to construct the priority 3-mile segment was delayed for approximately a year because the Indonesian government had acquired less than a quarter mile of right-of-way, significantly less land than USAID had expected to be available. Community opposition. Community opposition to the new road alignment resulted in delays, according to USAID. For example, construction was delayed because of disagreement between the Indonesian government and individuals and communities about the prices for land parcels. Also, for example, the proposed new alignment involved laying pavement over more than 600 gravesites. Upon learning that gravesites would be affected, some individuals and communities erected roadblocks and conducted demonstrations in opposition. To resolve the situation, Indonesian government officials, with USAID coordination assistance, had to negotiate settlements and identify and acquire new sites for the graves. Security problems. According to USAID, delays occurred because of security concerns and violence. For example, security threats caused delays in areas with a 30-year history of civil conflict between an insurgency group and the Indonesian government. Also, delays occurred when contractors received security threats, equipment was intentionally damaged, and workers were assaulted in land-value disputes. Figure 6 shows examples of community opposition that involved community protests, in some cases resulting in damage to contractor equipment. Flooding. During construction, delays resulted from flooding, caused by unusually heavy rains that destroyed temporary access to construction sites and to construction facilities where materials and equipment were located. In some instances, according to USAID, roads flooded even though drainage culverts had been built according to design specifications (see fig. 7). Subsequent to this flooding, the contractor corrected inaccurate design assumptions, caused by a lack of reliable historical climatological data for the area, and increased the capacities of some culverts. USAID's actions to ensure the Indonesia road's quality included, among others, hiring an experienced project manager and requiring 1-year warranties for completed road sections. USAID also required that the road's design adhere to established quality standards and required inspections of road sections during and after construction. However, as of July 2012, USAID had not arranged for final inspections to ensure the quality of around 50 miles--about 55 percent--of the completed road that are still under warranty. To help ensure the quality of the road's design and construction, USAID established organizational and operational controls by contracting with experienced personnel for key management positions and including a 1- year warranty in each construction contract. Project Manager. In April 2006, USAID hired a U.S.-registered professional engineer as its Project Manager for the entire road construction project. The Project Manager had previous experience managing several USAID infrastructure projects overseas as well as managing regional operations with a U.S. state's department of transportation. The Project Manager served as the project's chief technical officer and USAID's principal interface with design/construction supervision and construction contractors and Indonesian government officials. Design and supervision. Approximately 6 months before hiring its Project Manager, USAID contracted with Parsons as the project's construction management contractor to complete the design of most of the road and manage the supervision of its construction. According to a Parsons official, USAID's hiring of a single firm to complete the design and management of construction supervision facilitated communication between design engineers and construction supervision staff and promoted quality in construction. USAID required that key Parsons design personnel have appropriate qualifications. For example, geotechnical, pavement, and structural designers were all required to be registered professional engineers with a minimum of 5 years experience on projects of a similar scope. In addition, USAID required that key Parsons' staff in Indonesia have certain qualifications, such as skills and experience in contract administration, inspection, and quality monitoring, to help ensure that the work complied with specifications and conformed to standard construction practices. One-year warranty. USAID included a 1-year warranty period in all of its contracts with construction firms. Specifically, for a period of 1 year after each road section is completed, the contractor is required to correct any poor-quality or faulty work that USAID or Parsons finds during inspections.the Indonesian government until the contractor completes the corrective actions, and contractors are not released from their responsibilities until the Indonesian government formally accepts the section of road. To promote quality in the road's design, USAID required that Parsons adhere to established engineering standards. These standards define, among other things, key parameters such as lane and right-of-way widths, pavement structure, curve geometry, and weight-carrying capacity. To design pavement and bridge structures that would be capable of carrying anticipated vehicle loads, for example, design engineers used the widely accepted U.S. standards of the American Association of State Highway and Transportation Officials (AASHTO) as well as regionally and locally applicable Indonesian standards, such as those of the Association of Southeast Asian Nations. Use of AASHTO pavement design standards enabled engineers to determine the thickness of the road's layers (aggregate base layers covered with an asphalt surface) that would be needed to sustain anticipated traffic volumes and vehicle weights over its 10-year design life. In addition, use of AASHTO and Indonesian bridge standards allowed engineers to determine appropriate structural configurations for bridges in consideration of site-specific traffic, thermal, and seismic conditions. Parsons also included several safety features in the design--for example, guardrails, warning signs, pavement markings, and protected walkways on bridges--that contributed to the road's quality. Figure 8 illustrates these features. During construction, USAID's Project Manager and Parsons took actions to help ensure quality by observing ongoing work, witnessing tests by construction contractors, conducting their own inspections, and requiring that the contractor correct any deficiencies or substandard work. For example, after determining that use of improper materials had resulted in the deterioration of approximately 6 miles of paved lanes, USAID directed the prime contractor to remove and replace these sections of the road. Parsons' staff were involved in performing daily quality tests and conducting inspections. Parsons provided information to USAID's Project Manager through frequent communication, correspondence, joint site reviews, and periodic reporting. USAID's Project Manager and Parsons inspected road sections during construction, when construction was completed, and when the completed sections were handed over to the Indonesian government following the 1- year warranty period. Key project stakeholders--USAID's Project Manager, Parsons, the construction contractor, and Indonesian government officials--attended these inspections. When an inspection identified deficiencies, USAID and Parsons ensured that they were corrected before the road section was formally turned over to the Indonesian government. For example, during our March 2012 visit to Aceh Province, Indonesia, we observed one of the construction contractors repairing defective pavement that USAID's Project Manager had identified during an inspection near the end of the 1-year warranty for the affected section. Figure 9 shows a contractor using a milling machine to remove pavement on this section in preparation for corrective repaving. USAID currently lacks the capacity to ensure the quality of several sections of recently completed road that are still within the 1-year warranty period. Several sections totaling approximately 50 miles in length, or about 55 percent of the recently completed road, are currently under warranty--about 25 miles with warranties expiring at various times through the end of 2012 and about 25 miles with warranties expiring from January 2013 through April 2013. Figure 10 shows the locations of road sections with unexpired warranties, as of June 2012, and section expiration dates. USAID officials in Jakarta told us in April 2012 that USAID was considering rehiring the former Project Manager on an intermittent basis to perform inspections of the approximately 50 miles of road sections prior to expiration of the sections' 1-year warranties. However, as of July 2012, USAID had not yet reached an agreement with the Project Manager or made other arrangements to inspect the sections. To enhance the Indonesia road's sustainability, USAID designed and constructed it to withstand heavy weights, included in the design several features intended to minimize environmental impact, and provided assistance to the Indonesian Directorate General of Highways (the Directorate). However, several factors, such as the Directorate's limited capacity and resources and failure to restrict overweight vehicles, could lessen the road's sustainability during its intended 10-year life expectancy. USAID took several actions intended to enhance the road's sustainability for the intended 10-year life expectancy. For example, in designing and constructing the road, USAID anticipated the effects of heavy trucks--the most significant factor affecting the rate of pavement deterioration. USAID also included in the road's design the following features intended to enhance sustainability and minimize environmental impact: rock placement, known as armoring, along the shoreline to protect road from storm surges; shaped slopes and rock-fall retaining walls in mountainous areas to protect the road from damage; retainer and drainage systems to protect the road from rock falls and prevent flooding; concrete lining of drainage channels to prevent erosion; slope stabilization using Gabion baskets; galvanized steel bridge structures that do not require periodic painting. Figure 11 illustrates these features intended to enhance the road's sustainability. In addition, USAID's Project Manager developed an operations and maintenance plan for the Directorate. The plan included recommended practices such as establishing road maintenance facilities and placing equipment at three locations to maintain the road, with specific maintenance responsibilities for each site. The plan also outlined necessary maintenance tasks, such as patching pavement, repairing guardrails, and cleaning culverts and drains, and it provided a checklist of equipment needed by the Directorate. Further, USAID's Project Manager suggested, among other things, that the Directorate limit the width and size of vehicles permitted to pass through narrow mountainous road sections. Figure 12 shows a truck passing through a narrow mountainous section of road that was repaved. USAID also took other actions, such as employing local workers and donating used vehicles, that could enhance the road's sustainability. USAID encouraged contractors to employ Indonesian workers from Aceh Province during the construction work to enhance local skills and experience. For example, construction contractors employed Indonesian heavy equipment operators and truck drivers, and Parsons trained Indonesians to fill several key positions such as Finance Manager and Public Information/Media Specialist. Also, according to USAID officials, after the construction work was completed, USAID and Parsons provided the Directorate with used vehicles for use in maintaining the road. Several factors--the Directorate's limited capacity and resources, failure to restrict overweight vehicles, construction in the road right-of-way, and unauthorized access roads--could lessen the road's sustainability for its intended 10-year life expectancy. Limited capacity and resources. Although the Directorate has provided a 5-year funding plan for the road and taken some actions to replace missing guardrails, the Directorate lacks some equipment as well as a sufficient number of staff for maintenance and repairs, according to USAID and Directorate officials. For example, USAID recommended in its checklist that the Directorate keep a jackhammer, compressor, and four vibrator rollers at each of three proposed maintenance facilities, but as of May 2012, the Directorate had not established the maintenance facilities and had not provided the equipment. Also, according to Directorate officials in Banda Aceh, the Directorate has a limited number of staff to maintain existing roads throughout Aceh Province. Overweight vehicles. The Directorate has not taken action to restrict the use of overweight vehicles on the road, which could reduce the road's life expectancy. USAID's design of the road with a 10-year life expectancy is based on certain assumptions concerning the impact of the number and weight of vehicles on the road's deterioration. For example, USAID's design assumes that the heaviest trucks anticipated (100,000-pound, 3-axle trucks) on the road will comprise less than 1 percent of total traffic; however, this low volume of heavy truck traffic will cause more than 60 percent of the road's deterioration over its 10-year design life. A greater than expected volume of heavy truck traffic, or use of the road by trucks that exceed 100,000 pounds, will lead to a higher amount of deterioration and reduced life for the road. To thwart acceleration of pavement damage resulting from overweight vehicles using the road, USAID recommended that the Directorate use portable scales to weigh suspected overweight vehicles. However, as of May 2012, the Directorate had not taken any actions to weigh vehicles. During our March 2012 inspection of the road, we observed several heavily loaded trucks but saw no permanent weigh stations and saw no vehicles being weighed with portable scales. Construction in right-of-way. The road's intended 10-year life expectancy is also based on keeping drainage culverts in the right-of- way clear of blockage, according to USAID's Project Manager. However, the Directorate has not taken action to prevent the construction of buildings and has not removed existing buildings that have been constructed in the right-of-way. Such construction could obstruct drainage channels and cause erosion and flooding. According to USAID officials, USAID informed the Directorate of numerous instances where buildings had been or were being constructed in the right-of-way, but as of May 2012, the Indonesian government had not taken any actions to remove or prevent such construction. When we traveled the length of the road in March 2012, we observed a completed building that had been constructed in the right-of-way over the drainage channel. Unauthorized access roads. As of March 2012, according to USAID's Project Manager, the Directorate had not taken action to prevent the creation of unauthorized access roads, which also can prevent proper drainage and cause erosion and flooding. These unauthorized access roads have been constructed by removing guardrail or moving soil, rocks, and other materials; in some instances, these access roads may obstruct drainage channels and cause erosion and flooding. During our March 2012 inspection of the road, we saw several access roads that had been built by removing guardrails and moving soil and other materials. Figure 13 shows a building that was constructed in the right-of-way and an unauthorized access road where the guardrail was removed. USAID has completed the construction of a major 91-mile road in a coastal area of northern Indonesia that was heavily affected by the December 2004 tsunami and, in doing so, has helped to provide an opportunity for economic growth in the region. Although USAID completed the road construction more than 2 years later than planned, the agency finished the work by confronting and overcoming significant obstacles while working in a challenging environment. However, despite taking several actions to help ensure the road's quality, USAID currently lacks the capacity to ensure that approximately 50 miles of recently completed road sections--55 percent of the entire road--still under warranty perform as intended through the 1-year warranty period, as stipulated in USAID's contracts with construction firms. Specifically, although USAID officials in Jakarta told us that they are considering rehiring the Project Manager on an interim contract, the agency has not finalized this arrangement. Without qualified personnel inspecting these road sections before their warranties expire, USAID cannot ensure that the quality standards are met and that the contractor corrects any deficiencies as required within the 1-year warranty period. To help ensure that the road will reach its intended 10-year life expectancy, USAID took actions such as designing the road in accordance with established standards and supporting the Indonesian government's Directorate for Highways. However, the road may not achieve its 10-year life expectancy unless the Indonesian government properly maintains the road, restricts usage by overweight vehicles, and prevents construction in the road right-of-way and creation of unauthorized access roads. We recommend that the Administrator of USAID take the following two actions: To help ensure that recently completed sections of the Indonesia road meet quality standards as required during the 1-year warranty period, ensure that the road sections are inspected in a timely manner and, if deficiencies are found, require that the construction contractor repair the sections before they are formally turned over to the Indonesian government. To help ensure that the constructed road remains sustainable for 10 years as intended, direct the USAID Mission in Indonesia to work with the Indonesian government to develop and implement a process addressing factors that could affect the road's sustainability. We provided a draft of this report, as well as a video of our March 2012 inspection of the road, to USAID and State for their review. USAID provided written comments about the draft report, which are reprinted in appendix II, and provided technical comments about the draft report and the video that we incorporated as appropriate. State did not provide comments on either the draft report or the video. In its written comments, USAID stated that our report presented an accurate assessment of its construction operations and its efforts to ensure the road's quality and sustainability. In addition, USAID concurred with our recommendation that it ensure that road sections still under warranty are inspected in a timely manner and that it require the contractor to repair any defective sections. The agency stated that it will retain qualified personnel who can perform inspections before the warranties expire. USAID concurred with the intent of our recommendation that, to help ensure the road's sustainability for the intended 10 years, it should work with the Indonesian government to develop and implement a process addressing factors that could affect the road's sustainability. USAID noted that many of the factors that could affect the road's sustainability are outside the agency's managerial control and that, apart from the road sections still under warranty, the road is under the Indonesian government's administration. USAID indicated that any additional technical assistance it might offer the Indonesian government would be contingent on the government's receptiveness as well as the availability of USAID resources. We maintain that it is essential that USAID work proactively with the Indonesian government to develop and implement a process that addresses certain factors, such as the use of overweight vehicles, construction in the right- of-way, and the creation of unauthorized access roads, that could affect the road's sustainability. We are sending copies of this report to interested congressional committees, the Secretary of State, and the USAID Administrator. We will also provide copies to others on request. 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) 512-3149 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. We reviewed the 91-mile road constructed by the U.S. Agency for International Development (USAID) in Aceh Province, Indonesia, following the December 2004 tsunami. This is the third report we have conducted on USAID's post-tsunami reconstruction efforts. Our objectives in this report were to (1) describe USAID's road construction operations as well as factors that delayed the road's completion, (2) assess USAID efforts to ensure the road's quality, and (3) examine factors that could affect the road's sustainability. To determine the status and funding of USAID's road reconstruction activities in Aceh Province, Indonesia, we reviewed documents and interviewed officials from USAID's Bureau for Asia and the Near East and the Department of State's (State) Office of Foreign Assistance Resources in Washington, D.C.; and USAID's Office of Financial Management at its mission in Jakarta, Indonesia. We obtained information from USAID officials on internal controls for collection of data, reviewed consolidated reports and mission-specific reports, and interviewed cognizant officials at USAID and State about data reliability. In addition, we interviewed knowledgeable USAID officials about the systems and methodology they use to verify the completeness and accuracy of the data. We determined that the data were sufficiently reliable for the purposes of our report. To assess the reliability of USAID and State funding and expenditure data, we reviewed USAID Office of the Inspector General and previous GAO reports on USAID disaster reconstruction programs and funding since 2002; we found that none of these sources noted any discrepancies or concerns about the reliability of USAID's data. Based on our comparison of data generated from various USAID and State sources, we found that the sources generally corroborated each other. We determined that USAID and State funding and expenditure data were sufficiently reliable for our report. To assess the quality, construction features, and sustainability of the road construction, we traveled the full 91-mile length of the road from Banda Aceh to Calang, Indonesia, with USAID's Project Manager for the road construction project. We also traveled the road from Calang to Meulaboh, Indonesia, for comparative purposes. During our trip between Banda Aceh and Calang, we photographed and recorded video of several road construction features and activities, and recorded testimonyUSAID's Project Manager on construction features, obstacles, challenges, quality, and potential impediments to sustainability. In Banda Aceh, we met with representatives from the Indonesian Directorate General of Highways (the Directorate), which is responsible for maintaining the road. To better understand construction, quality, potential obstacles to sustainability, and general construction challenges, we met with representatives of both SsangYong and Hutama, the two firms that constitute the SsangYong-Hutama Joint Association. To identify obstacles that USAID encountered, we examined USAID Office of Inspector General and State reports which provide information on construction status as well as summarize major construction accomplishments and challenges. In Jakarta, Indonesia, we met with representatives from the Directorate. We also reviewed USAID road construction files to better understand the obstacles that led to delays and cost increases; this review included reviewing status reports, contracts, and correspondence. To examine the extent to which USAID ensured quality, we reviewed USAID road construction contracts and met with USAID's Project Manager to discuss oversight procedures. We also discussed USAID's road quality inspections and procedures for ensuring that construction contractors make repairs to damaged sections of road within the 1-year warranty period, as required. Members of our staff, including a U.S.- registered professional engineer, traveled the road and examined road quality through direct observation of road conditions, construction features, and repair work being performed. To examine the extent to which USAID helped ensure sustainability, we examined road operations and maintenance plans developed by USAID for the Directorate, which included practices that the USAID Project Manager recommended that the Directorate adopt and implement. We also examined the checklist of equipment developed by USAID's Project Manager and needed by the Directorate to maintain the road. Members of our staff, including a U.S.-registered professional engineer, made direct observations of road features that were designed and constructed for road sustainability. We conducted this performance audit from January 2012 to July 2012 in accordance with generally accepted government auditing standards. These 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, Emil Friberg, Jr. (Assistant Director), Michael Armes (Assistant Director, registered Professional Engineer), Ryan Barlow, Mason Calhoun, Reid Lowe, and George Taylor made key contributions to this report. Ashley Alley, Martin De Alteriis, Theresa Perkins, Jeremy Sebest, Jena Sinkfield, and Cynthia Taylor provided technical assistance. Haiti Reconstruction: Factors Contributing to Delays in USAID Infrastructure Construction. GAO-12-68. Washington, D.C.: November 16, 2011. Haiti Reconstruction: U.S. Efforts Have Begun, Expanded Oversight Still to Be Implemented. GAO-11-415. Washington, D.C.: May 19, 2011. Afghanistan Reconstruction: Progress Made in Constructing Roads, but Assessments for Determining Impact and a Sustainable Maintenance Program Are Needed. GAO-08-689. Washington, D.C.: July 8, 2008. Compact of Free Association: Palau's Use of and Accountability for U.S. Assistance and Prospects for Economic Self-Sufficiency. GAO-08-732. Washington, D.C.: June 10, 2008. Foreign Assistance: USAID Signature Tsunami Reconstruction Efforts in Indonesia and Sri Lanka Exceed Initial Cost and Schedule Estimates, and Face Further Risks. GAO-07-357. Washington, D.C.: February 27, 2007. Foreign Assistance: USAID Completed Many Caribbean Disaster Recovery Activities, but Several Challenges Hampered Efforts. GAO-06-645. Washington, D.C.: May 26, 2006. Foreign Assistance: USAID Has Begun Tsunami Reconstruction in Indonesia and Sri Lanka, but Key Projects May Exceed Initial Cost and Schedule Estimates. GAO-06-488. Washington, D.C.: April 14, 2006. Foreign Assistance: USAID's Earthquake Recovery Program in El Salvador Has Made Progress, but Key Activities Are Behind Schedule. GAO-03-656. Washington, D.C.: May 15, 2003. Foreign Assistance: Disaster Recovery Program Addressed Intended Purposes, but USAID Needs Greater Flexibility to Improve Response Capability. GAO-02-787. Washington, D.C.: July 24, 2002.

In December 2004, an earthquake in the Indian Ocean caused a major tsunami that devastated several countries, affecting Indonesia most severely. In May 2005, Congress appropriated $908 million for aid to the affected countries. USAID budgeted $245 million of this amount to rehabilitate and construct a 150-mile paved coastal road in Aceh Province, Indonesia, with a planned completion date of September 2009. After reducing the project's scope, USAID completed a 91-mile road in April 2012 at an estimated cost of $256 million. GAO was asked to (1) describe USAID's construction operations as well as factors that delayed the road's completion, (2) assess USAID's efforts to ensure the road's quality, and (3) examine factors that could affect the road's sustainability. GAO reviewed USAID documents, interviewed USAID and Indonesian officials, and traveled the entire length of the road. From August 2005 to September 2010, the U.S. Agency for International Development (USAID) awarded five contracts to reconstruct a major coastal road in Aceh Province, Indonesia. Three of the contracts were for construction, one contract was for design and supervision, and one contract was for project management. Several factors delayed the road's completion and increased costs. For example, according to USAID, when one contractor did not make acceptable progress, the agency reduced the scope of work, terminated construction of an 8-mile road section, and hired another contractor to complete the section. Other factors included the Indonesian government's difficulty in acquiring land for the road and local opposition to the new road alignment. USAID took several actions to ensure quality in the road's design and construction. For example, USAID hired an experienced, U.S.-registered professional engineer as Project Manager and hired a U.S.-based engineering firm to design the road and supervise most construction. USAID also required contractors to remain liable for any quality defects for 1 year after completing road sections. In addition, USAID required the Project Manager and the engineering firm to perform routine inspections, including final inspections when the warranties ended. Some inspections revealed poor-quality work that the contractors corrected. However, the engineering firm's and Project Manager's contracts ended in March 2012 and April 2012, respectively, leaving no qualified staff to inspect around 50 miles--more than half of the completed road--still under warranty. USAID told GAO it is considering rehiring the Project Manager on an intermittent basis, but USAID has not finalized this arrangement and has no mechanism to ensure quality in these sections. USAID also took several actions to help ensure the road's sustainability, such as designing it to withstand heavy weights and providing a maintenance plan and equipment to the Indonesian Directorate General of Highways. However, various factors could affect the road's sustainability for its intended 10-year design life. For example, according to USAID and Indonesian officials, the Directorate lacks resources needed to maintain the road. Also, according to USAID, the Indonesian government has not taken certain actions, such as using portable scales to prevent overweight vehicles that could cause pavement failure and prohibiting construction in the road right-of-way that could obstruct drainage. GAO recommends that USAID (1) ensure that road sections still under a 1-year warranty are inspected in a timely manner and require the construction contractor to make any needed repairs and (2) work with the Indonesian government to develop and implement a process addressing factors that could affect the road's sustainability. USAID stated that it concurred with GAO's first recommendation and concurred with the intent of GAO's second recommendation. View a video of GAO's March 2012 inspection of the road. h ttp://www.gao.gov/multimedia/video#video_id=592299.

Exchanges are intended to allow eligible individuals to obtain health insurance, and all exchanges, whether state-based or established and operated by the federal government, will be required to perform certain functions. The federal government's role with respect to an exchange for any given state is dependent on the decisions of that state. PPACA required that exchanges be established in each state to allow consumers to compare health insurance options available in that state and enroll in coverage. Once exchanges are established, individual consumers will be able to access the exchange through a website, toll- free call centers, or in person. The exchanges will present qualified health plans (QHP) approved by the exchange and offered in the state by the participating issuers of coverage. The benefits, cost-sharing features, and premiums of each QHP are to be presented in a manner that facilitates comparison shopping of plans by individuals. Once individuals wish to select a QHP, they will complete an application--through the exchange website, over the phone, in person, or by mailing a paper form--that collects the information necessary to determine their eligibility to enroll in a QHP. On the basis of the application, the exchange will determine individuals' eligibility for enrollment in a QHP, and also determine their eligibility for income-based financial subsidies--advance payment of premium tax credits and cost-sharing subsidies--to help pay for that coverage. Also at the time of the application, the exchange will determine individuals' eligibility for Medicaid and CHIP. After an individual has been determined to be eligible for enrollment in a QHP, the individual will be able to use tools on the exchange website to compare plans and make a selection. For individuals applying for enrollment in a QHP and for income-based financial subsidies, eligibility determinations and enrollment should generally occur on a near real-time basis, to be accomplished through the electronic transfer of eligibility information between the exchange and federal and state agencies, and through the electronic transfer of enrollment data between the exchange and QHP issuers. Assistance with the enrollment process will be provided to individuals either through the website, an established telephone call center, or in person. To undertake these functions, all exchanges, including those established and operated by the federal government, will be required to perform certain activities, many of which fall within the core functions of eligibility and enrollment, plan management, and consumer assistance. Eligibility and enrollment: All exchanges will be required to determine an individual's eligibility for QHP enrollment, income-based financial subsidies, and enrollment in Medicaid and CHIP. Exchanges will be required to enroll eligible individuals into the selected QHP or transmit information for individuals eligible for Medicaid or CHIP to the appropriate state agency to facilitate enrollment in those programs. The exchange is to use a single, streamlined enrollment eligibility system to collect information from an application and verify that information. CMS is building the data hub to support these efforts. The data hub is intended to provide data needed by the exchanges' enrollment eligibility systems to determine each applicant's eligibility. Specifically, the data hub will provide one electronic connection and near real-time access to the common federal data, as well as provide access to state and third party data sources needed to verify consumer application information. For example, the data hub is to verify an applicant's Social Security number with the Social Security Administration (SSA), and to access the data from the Internal Revenue Service (IRS) and the Department of Homeland Security (DHS) that are needed to assess the applicant's income, citizenship, and immigration status. The data hub is also expected to access information from the Veterans Health Administration (VHA), Department of Defense (DOD), Office of Personnel Management (OPM), and Peace Corps to enable exchanges to determine if an applicant is eligible for insurance coverage from other federal programs that would make them ineligible for income-based financial subsidies. In states in which an FFE will operate, the hub is also expected to access information from state Medicaid and CHIP agencies to identify whether FFE applicants are already enrolled in those programs. Plan management: Exchanges will be required to develop and implement processes and standards to certify health plans for inclusion as QHPs and recertify or decertify them, as needed. As part of these processes, the exchange must develop an application for issuers of health coverage that seek to offer a QHP. The exchange must review a particular plan's data to ensure it meets certification standards for inclusion in the exchange as a QHP. The exchange must also conduct ongoing oversight and monitoring to ensure that the plans comply with all applicable regulations. Consumer assistance: All exchanges will be required to provide a call center, website, and in-person assistance to support consumers in filing an application, obtaining an eligibility determination, comparing coverage options, and enrolling in a QHP. Other consumer assistance function activities that exchanges must conduct are outreach and education to raise awareness of and promote enrollment in QHPs and income-based financial subsidies. One such form of consumer assistance required by PPACA is the establishment of Navigators--entities, such as community and consumer-focused nonprofit groups, to which exchanges award grants to provide fair and impartial public education regarding QHPs, facilitate selection of QHPs, and refer consumers as appropriate for further assistance. The role of the federal government with respect to an exchange for a state is dependent on whether that state seeks to operate a state-based exchange. States can choose to establish exchanges as directed by PPACA and seek approval from CMS to do so. States electing to establish and operate a state-based exchange in 2014 were required to submit to CMS, by December 14, 2012, a declaration of intent and the "Blueprint for Approval of Affordable State-based and State Partnership Insurance Exchange." Through this Blueprint, the state attests to how its exchange meets, or will meet, all legal and operational requirements associated with a state-based exchange. For example, the state must demonstrate that it will establish the necessary legal authority and governance, oversight, financial-management processes, and the core exchange functions of eligibility and enrollment, plan management, and consumer assistance. Although a state assumes responsibility for the exchange when it elects to operate a state-based exchange, it can choose to rely on the federal government for certain exchange-related activities, including determining individuals' eligibility for income-based financial subsidies and activities related to reinsurance and risk adjustment.issuers on behalf of enrollees in all exchanges. In addition, CMS will make financial subsidy payments to Under PPACA, if a state did not elect to establish a state-based exchange or is not approved by CMS to operate its own exchange, then CMS is required to establish and operate an FFE in that state. Although the federal government retains responsibility to establish and operate each FFE, CMS has identified possible ways that states may assist it in the day-to-day operation of these exchanges: CMS indicated that a state can choose to participate in an FFE through a partnership exchange by assisting CMS with the plan management function, consumer assistance function, or both. According to CMS, the overall goal of a partnership exchange is to enable the FFE to benefit from efficiencies to the extent states have regulatory authority and capability to assist with these functions, help tailor the FFE to that state, and provide a seamless experience for consumers. The agency also noted that a partnership exchange can serve as a path for states toward future implementation of a state- based exchange. Although the states would assist in carrying out the plan management function, consumer assistance function, or both on a day-to-day basis, CMS would retain responsibility for these and all other FFE functions. For example, for plan management, states would recommend QHPs for certification, and CMS would decide whether to approve the states' recommendations and, if so, implement them. In the case of consumer assistance, states would manage an in-person assistance program and Navigators and may choose to conduct outreach and education activities. However, CMS would be responsible for awarding Navigator grants and training Navigators, and would operate the exchange's call center and website. By February 15, 2013, states seeking to participate in a partnership exchange had to submit a declaration letter and Blueprint to CMS regarding expected completion dates for key activities related to their participation. CMS indicated in guidance issued on February 20, 2013, that an FFE state choosing not to submit a Blueprint application for a partnership exchange by the February 15, 2013, deadline could still choose to assist it in carrying out the plan management function on a day-to-day basis. CMS officials said that, operationally, the plan management functions performed by these states will be no different than the functions performed by partnership exchange states. Instead of a Blueprint application, states interested in participating in this alternative type of arrangement had to submit letters attesting that the state would perform all plan management activities in the Blueprint application. Even in states in which CMS will operate an FFE without a state's assistance, CMS plans to rely on states for certain information. For example, it expects to rely on state licensure of health plans as one element of its certification of a QHP. After a state submits an application to operate a state-based exchange or participate in a partnership exchange, CMS may approve or conditionally approve the state for that status. Conditional approval indicates that the state had not yet completed all steps necessary to carry out its responsibilities in a state-based exchange or partnership exchange, but its exchange is expected to be ready to accept enrollment on October 1, 2013. To measure progress towards completing these steps, CMS officials indicated that the agency created a set of typical dates for when specific activities would need to be completed in order for the exchanges to be ready for the initial enrollment period. The agency then adapted those dates for each state establishing a state-based exchange or participating in a partnership exchange. The agency officials said that if the state indicated in its Blueprint that it planned to complete an activity earlier than CMS's typical targeted completion date, CMS accepted the state's earlier date. If the state proposed a date that was later than CMS's typical targeted completion date, the state had to explain the difference and CMS determined whether that date would allow the exchange to be ready for the initial enrollment period. The agency indicated that a state's conditional approval continues as long as it conducts the activities by the target dates agreed to with the individual state and demonstrates its ability to perform all required exchange activities. CMS's role in operating an exchange in a particular state may change for future years if states reassess and alter the roles they play in establishing and operating exchanges. For example, a state may be approved to participate in a partnership exchange in 2014 and then apply, and receive approval, to run a state-based exchange in 2015. Although the federal government would retain some oversight over the state-based exchange, the responsibility for operating the exchange would shift from the federal government to the state. HHS indicated that it has drawn from several different appropriations to fund CMS activities to establish and operate FFEs and the data hub. These include the Health Insurance Reform Implementation Fund, HHS's General Departmental Management Account, and CMS's Program Management Account. HHS also indicated that it plans to use funds from the Prevention and Public Health Fund and the agency's Nonrecurring Expenses Fund to pay for certain exchange activities in 2013.will assist with eligibility determinations and activities to make people Specifically, the agency plans to use these funds for activities that aware of insurance options and enrollment assistance available to them. For fiscal year 2014, CMS has estimated that it will need almost $2 billion to establish and operate the FFEs. Specifically, the President's fiscal year 2014 budget requests $1.5 billion in appropriations for CMS's Program Management Account for the implementation and operation of the exchanges. In addition to this amount, it estimated that $450 million in user fees will be collected from issuers of health coverage participating in the exchanges in fiscal year 2014 and credited to the Program Management Account.used for activities related to operation of the exchanges, including eligibility and enrollment, consumer outreach, plan oversight, SHOP and employer support, information-technology systems, and financial management. According to the agency, these funds will be In addition to these sources of funding, the agency also awarded grants with funds appropriated under section 1311 of PPACA to states in which an FFE will operate for activities related to the FFE. These include the plan management and consumer assistance activities that certain states will undertake on behalf of the FFE, as well as the development of state data systems to coordinate with the FFE. CMS expects to operate an FFE in 34 states in 2014. States are expected to assist with certain day-to-day functions in 15 of these FFEs. However, the precise activities that CMS and the states will perform have not been finalized and may continue to evolve. For 2014, CMS will operate the exchange in 34 states, although it expects that states will assist in carrying out certain activities in almost half of those exchanges. As of May 2013, 17 states were conditionally approved by CMS to establish state-based exchanges. CMS granted conditional approval to these states in letters issued from December 2012 to January 2013. CMS is required to operate an FFE in the remaining 34 states. While CMS will retain full authority over each of these 34 FFEs, it plans to allow 15 of the states to assist it in carrying out certain exchange functions. Specifically, as of May 2013, CMS granted 7 FFE states conditional approval to participate in a partnership exchange. CMS issued these conditional approval letters from December 2012 to March 2013. Of the 7 partnership exchange states, 6 (Arkansas, Delaware, Illinois, Michigan, New Hampshire, and West Virginia) indicated that they planned to assist with both the plan management and consumer assistance functions of the exchange and 1 (Iowa) indicated that it would only assist with the plan management function. In an alternate arrangement, CMS plans to allow the other 8 of these 15 FFE states (Kansas, Maine, Montana, Nebraska, Ohio, South Dakota, Utah, and Virginia) to assist In the remaining 19 FFE states, with the plan management function.CMS plans to operate all functions of an FFE without states' assistance for plan year 2014. (See fig. 1 for a map of exchange arrangements for 2014.) Some states also informed CMS of whether or not they chose to carry out certain other activities related to the exchanges. First, CMS officials said that all states with an FFE are to notify CMS whether or not their relevant state agencies will determine the Medicaid/CHIP eligibility for individuals who submit applications to the FFE or if the states will delegate this function to the FFE. As of May 2, 2013, CMS officials indicated that none of the 34 FFE states had notified CMS as to whether they would conduct Medicaid/CHIP eligibility determinations rather than delegate this responsibility to CMS. CMS officials indicated that states do not have a deadline for notifying CMS of their decisions on this area, but would have to do so before initial enrollment on October 1, 2013. Second, states notified CMS as to whether they would operate a transitional reinsurance program. CMS indicated that for plan year 2014, two state-based exchange states--Connecticut and Maryland--notified CMS that they would each operate a transitional reinsurance program, leaving CMS to operate programs in the remaining 49 states. The activities that CMS and the states each plan to carry out to establish the exchanges have evolved recently. CMS was required to certify or conditionally approve any 2014 state-based exchanges by January 1, 2013. CMS extended application deadlines leading up to that date to provide states with additional time to determine whether they would operate a state-based exchange. On November 9, 2012, CMS indicated that in response to state requests for additional time, it would extend the deadline for submission of the Blueprint application for states that wished to operate state-based exchanges in 2014 by a month to December 14, 2012. The agency noted that this extension would provide states with additional time for technical support in completing the application. At the same time, the agency extended the application deadline for states interested in participating in a partnership exchange by about 3 months to February 15, 2013. In addition, the option for FFE states to participate in an alternative arrangement to provide plan management assistance to the FFE was made available to states by CMS in late February. CMS did not provide states with an explicit deadline for them to indicate their intent to participate in this arrangement, but CMS officials said April 1, 2013, was a natural deadline because issuers of health coverage had to know by then to which entity--CMS or the state--to submit health plan data for QHP certification. The specific activities CMS will undertake in each of the state-based and partnership exchanges may continue to change if states do not make adequate progress toward completion of their required activities. When CMS granted conditional approval to states, it was contingent on states meeting several conditions, such as obtaining authority to undertake exchange activities and completing several required activities by specified target dates. For example, in April 2013, CMS officials indicated that Michigan--a state that had been conditionally approved by CMS in March to participate in a partnership exchange--had not been able to obtain passage of legislation allowing the state to use federal grant funds to pay for exchange activities, which had been a requirement of its conditional approval. As of May 2, 2013, CMS officials expected that Michigan would remain a partnership exchange state, but indicated that Michigan may not be able to conduct consumer assistance without funding authority. They noted, however, that a final decision about Michigan's responsibilities had not been determined. In addition, on May 10, 2013, CMS indicated that it intended to allow Utah's exchange, which was conditionally approved as a state-based exchange in January 2013, to now be an FFE. Officials indicated that final approval for state-based and partnership exchanges will not be granted until the states have succeeded in completing required activities, and that some of these exchanges may still be under conditional approval when enrollment begins on October 1, 2013. Agency officials indicated that they are working with each state to develop mitigation strategies to ensure that all applicable exchange functions are operating in each state on October 1, 2013. CMS officials said that they are assessing the readiness of each state as interim deadlines approach. For example, issuers began submitting applications to exchanges for QHP certification on April 1, 2013. Therefore, CMS officials said that they began assessing state readiness for this activity in March 2013. They also indicated that CMS is doing this kind of assessment for each state as deadlines approach for other functions--such as eligibility and enrollment, and consumer assistance. If a state is not ready to carry out a specific responsibility, CMS officials said the agency will support them in this area. As of May 2, 2013, CMS had not granted final approval to any state to operate a state-based exchange or participate in a partnership exchange. If any state conditionally approved to operate a state-based exchange or to participate in a partnership exchange does not adequately progress towards implementation of all required activities, CMS has indicated that it would carry out more exchange functions in that state. CMS officials indicated that exchanges receiving this assistance would retain their status as a state-based or partnership exchange. CMS has completed many activities necessary to establish FFEs and the data hub. The agency established targeted completion dates for the many activities that remain to be completed by the beginning of initial enrollment on October 1, 2013, and certain activities were behind schedule. CMS issued numerous regulations and guidance that it has said are necessary to set a framework within which the federal government, states, issuers of health coverage, and others can participate in the exchanges. For example, in March 2012, the agency issued a final rule regarding implementation of exchanges under PPACA, and in February 2013, it issued a final rule setting forth minimum standards that all health insurance issuers, including QHPs seeking certification on a state-based exchange or FFE, have to meet. The March 2012 rule, among other things, sets forth the minimum federal standards that state-based exchanges and FFEs must meet and outlines the process a state must follow to transition between types of exchanges. The February 2013 rule specifies benefit design standards that QHPs must meet to obtain certification. That rule also established a timeline for QHPs to be accredited in FFEs. CMS also issued a proposed rule related to the Navigator program on April 5, 2013. This rule proposes conflict of interest, training, and certification standards that will apply to Navigators in FFEs. CMS officials expected to issue this final rule prior to initial enrollment. CMS officials indicated that before initial enrollment begins in October 2013, they would propose an additional rule that would set forth exchange oversight and records retention requirements, among other things. On June 14, 2013, CMS released this proposed rule, which will be published in the Federal Register on June 19, 2013. CMS also issued guidance specifically related to the establishment of FFEs and partnership exchanges to assist states seeking to participate in a partnership exchange and issuers seeking to offer QHPs in an FFE, including a partnership exchange. For example, the agency issued general guidance on FFEs and partnership exchanges in May 2012 and January 2013, respectively. On April 5, 2013, the agency issued guidance to issuers of health coverage seeking to offer QHPs through FFEs or partnership exchanges. In addition to establishing the basic exchange framework for state-based exchanges and FFEs, including partnership exchanges, CMS also completed activities needed to establish the core FFE functions-- eligibility and enrollment, including the data hub; plan management; and consumer assistance. (See table 1.) CMS established timelines to track its completion of the remaining activities necessary to establish FFEs. CMS has many key activities remaining to be completed across the core exchange functions--eligibility and enrollment, including development and implementation of the data hub; program management; and consumer assistance. In addition, the agency established targeted completion dates for the required activities that states must perform in order for CMS to establish partnership exchanges in those states. However, the completion of certain activities was behind schedule. CMS expects to complete development and testing of the information technology systems necessary for FFEs to determine eligibility for enrollment into a QHP and to enroll individuals by October 1, 2013, when enrollment is scheduled to begin for the 2014 plan year. As of April 2013, CMS indicated that it still needed to complete some steps to enable FFEs to be ready to test development of key eligibility and enrollment functions, including calculation of advance payments of the premium tax credits and cost-sharing subsidies, verification of consumer income, and verification of citizenship or lawful presence. CMS indicated that these steps will be completed in July 2013. For one activity--the capacity to process applications and updates from applications and enrollees through all channels, including in-person, online, mail, and phone--CMS estimated that the system will be ready by October 1, 2013. CMS officials said that redeterminations of consumer eligibility for coverage will not occur until the middle of 2014. Effective use of the FFEs' eligibility and enrollment systems is dependent upon CMS's ability to provide the data needed to carry out eligibility determination and enrollment activities through the implementation of the data hub. According to program officials, CMS established milestones for completing the development of required data hub functionality by July 2013, and for full implementation and operational readiness by September 2013. Project schedules reflect the agency's plans to provide users access to the hub for near real-time data verification services by October 1, 2013. Agency officials stated that ongoing development and testing activities are expected to be completed to meet the October 1, 2013, milestone. Additionally, CMS has begun to establish technical, security, and data sharing agreements with federal partner agencies and states, as required by department-level system development processes. These include Business Service Definitions (BSDs), which describe the activities, data elements, message formats, and other technical requirements that must be met to develop, test, and implement capabilities for electronically sharing the data needed to provide various services, such as income and Social Security number verification. Computer Matching Agreements, which establish approval for data exchanges between various agencies' systems and define any personally identifiable information the connecting entity may access through its connection to the data hub; and Data Use Agreements, which establish the legal and program authority that governs the conditions, safeguards, and procedures under which federal or state agencies agree to use data. For example, CMS officials stated that they established Data Use Agreements with OPM and the Peace Corps in April 2013 and completed BSDs by mid-June. Additionally, these officials plan to obtain final approval of Computer Matching Agreements with IRS, SSA, DHS, VHA, and DOD by July 2013. CMS began conducting both internal and external testing for the data hub in October 2012, as planned. The internal testing includes software development and integration tests of the agency's systems, and the external testing begun in October included secured communication and functionality testing between CMS and IRS. These testing activities were scheduled to be completed in May 2013. CMS has also begun to test capabilities to establish connection and exchange data with other federal agencies and the state agencies that provide information needed to determine applicants' eligibility to enroll in a QHP or for income-based financial subsidies, such as advance premium tax credits and cost- sharing assistance, Medicaid, or CHIP. For example, CMS officials stated that testing with 11 states began on March 20, 2013, and with five more states in April. They also stated that, although originally scheduled to begin in April, testing with SSA, DHS, VHA and Peace Corps started early in May 2013 and that testing with OPM and DOD was scheduled to begin in July 2013. Additionally, CMS recently completed risk assessments and plans for mitigating identified risks that, if materialized, could negatively affect the successful development and implementation of the data hub. While CMS stated that the agency has thus far met project schedules and milestones for establishing agreements and developing the data hub, several critical tasks remain to be completed before the October 1, 2013, implementation milestone. (See fig. 2). According to CMS officials and the testing timeline: Service Level Agreements (SLA) between CMS and the states, which define characteristics of the system once it is operational, such as transaction response time and days and hours of availability, are planned to be completed in July 2013; SLAs between CMS and its federal partner agencies that provide verification data are expected to be completed in July 2013; and Completion of external testing with all federal partner agencies and all states is to be completed by the beginning of September 2013. The activities that remain for CMS to implement the plan management function primarily relate to the review and certification of the QHPs that will be offered in the FFEs. CMS has set time frames that it anticipates will allow it to certify and upload QHP information to the exchange website in time for initial enrollment. CMS indicated that its system for issuers of health coverage to submit applications for QHP certification was available by April 1, 2013, and issuers were to submit their Once received, CMS, with the assistance applications by May 3, 2013.of its contractor, expects to evaluate and certify health plans as QHPs by July 31, 2013. CMS will then allow issuers to preview and approve QHP information that will be presented on the exchange website by August 26, 2013. CMS then expects to finalize the QHP information and load it into the exchange website by September 15, 2013. For those 15 FFEs for which states will assist with the plan management function, CMS will rely on the states to ensure the exchanges are ready by October 2013. In contrast to other FFE states in which CMS manages all aspects of the QHP application and certification process, these 15 states were to evaluate health issuer plan applications to offer a QHP in the exchange and submit recommendations to CMS regarding the plans to be certified as QHPs. CMS indicated that the states are expected to submit their recommendations by July 31, 2013, which is also when CMS expects to complete its evaluation of QHPs for the other FFE states. (See fig. 3.) CMS has yet to complete many activities related to consumer assistance and outreach, and some initial steps were behind schedule. Specifically, several steps necessary for the implementation of the Navigator program in FFEs have been delayed by about 2 months. CMS had planned to issue the funding announcement for the Navigator program in February 2013 and have two rounds of awards, in June and September 2013. However, the announcement was delayed until April 9, 2013, and CMS officials indicated that there would be one round of awards, with an anticipated award date of August 15, 2013. CMS did not indicate the number of awards it expected to make, but noted that it expects that at least two types of applicants will receive awards in each of the 34 FFE states, and at least one will be a community or consumer-focused nonprofit organization. CMS officials indicated that, despite these delays, they planned to have Navigator programs operating in each FFE state by October 1, 2013. Before any federally funded in-person assisters, including Navigators, can begin their activities, they will have to be trained and certified. For example, these individuals are required to complete an HHS-approved training program and receive a passing score on all HHS-approved certification exams before they are able to assist with enrollment activities. CMS officials said that the required training for Navigators will be web-based, and it is under development. According to CMS, the Navigator training will be based on the training content that is being developed for agents and brokers in the FFEs and partnership exchanges, which CMS indicates is near completion. In addition, CMS is developing similar web-based training for the state partnership exchange in-person assistance programs. While CMS had planned to begin Navigator training in July 2013, under its current plan, the agency will not have awarded Navigator grants by this date. CMS indicated that it plans to complete development of the training curriculum and certification exam in July or August 2013. CMS officials expected that the training would begin in the summer of 2013, following completion of the curriculum and exam. Each of the six partnership exchange states that CMS conditionally approved to assist with certain consumer assistance responsibilities plans to establish other in-person assistance programs that will operate in addition to Navigator programs in these states. The dates by which the states planned to release applications and select in-person assisters varied. (See fig. 4.) For example, according to the conditional approval letters, one partnership exchange state planned to select in-person assisters by March 1, 2013, to begin work by May 15, 2013, while another planned to make that selection by August 1, 2013, to begin work by September 1, 2013. Five of the states' required activities indicated that they planned to add state-specific modules to the required federal training for Navigators and in-person assisters. As of April 24, 2013, CMS indicated that these six partnership exchange states had made progress, but the completion of some activities was behind schedule.the applications to select in-person assisters by April 2013 had done so. While the deadline for most states to select in-person assisters had not passed as of April 24, 2013, there were delays for two states. One state that planned to select in-person assisters by March 15, 2013 delayed that deadline to May 30, 2013, while the other delayed it to June 15. CMS indicated that these delays are not expected to affect the implementation of these programs. However, the state now planning to complete selection by May 30, 2013, had originally planned to begin training assisters in March and begin work May 15, 2013. The second state had planned that in-person assisters would begin work August 1, 2013. For example, three states that had planned to release CMS and states with partnership exchanges have also begun, and established time frames for, undertaking other outreach and consumer assistance activities that are necessary to implement FFEs. CMS recommended that in-person outreach activities begin in the summer of 2013 to educate consumers in advance of the open enrollment period. Examples of key activities that remain to be completed include the federal call center, healthcare.gov website, media outreach, and the consumer complaint tracking system for the FFEs. While states with partnership exchanges will utilize the federal call center and website, they have established plans for undertaking other outreach and consumer assistance activities. (See table 2.) CMS data indicated that the agency spent almost $394 million from fiscal year 2010 through March 31, 2013, through contracts to complete activities to establish the FFEs and the data hub and carry out certain other exchange-related activities. CMS officials said that these totals did not include CMS salaries and other administrative costs, but rather reflected the amounts obligated for contract activities. The majority of these obligations, about $248 million (63 percent), were incurred in fiscal year 2012. The sources of the $394 million in funding were three appropriation accounts: HHS's General Departmental Management Account, CMS's Program Management Account, and the Health Insurance Reform Implementation Fund. The majority of the funding came from the CMS Program Management Account (66 percent) followed by the Health Insurance Reform Implementation Fund (28 percent). (See fig. 5.) CMS reported that the almost $394 million supported 64 different types of projects through March 31, 2013. The highest volume of obligations related to the development of information technology systems for the FFEs. The 10 largest project types in terms of obligations made through March 31, 2013, accounted for $242.6 million, 62 percent of the total obligations. (See table 3.) These activities were carried out by 55 different contractors.10 contractors accounted for $303.4 million (77 percent of total obligations) for activities to support establishment of FFEs and the data hub and carry out certain other exchange-related activities. (See table 4.) Their contracts were for projects related to information technology, the healthcare.gov website, call center, and technical assistance for the FFEs. For one contract, with CGI Federal, CMS obligated about $88 million for activities to support establishment of the FFEs, such as information technology and technical assistance. For another contract, with Quality Software Services, Inc., CMS obligated about $55 million for related activities, including to support development of the data hub. (See app. I for each contract by the contractor, the amount obligated, the fiscal year in which funds were obligated, and the source of funding.) FFEs along with the data services hub services are central to the goal under PPACA of having health insurance exchanges operating in each state by 2014, and of providing a single point of access to the health insurance market for individuals. Their development has been a complex undertaking, involving the coordinated actions of multiple federal, state, and private stakeholders, and the creation of an information system to support connectivity and near real-time data sharing between health insurance exchanges and multiple federal and state agencies. Much progress has been made in establishing the regulatory framework and guidance required for this undertaking, and CMS is currently taking steps to implement key activities of the FFEs, and developing, testing, and implementing the data hub. Nevertheless, much remains to be accomplished within a relatively short amount of time. CMS's timelines and targeted completion dates provide a roadmap to completion of the required activities by the start of enrollment on October 1, 2013. However, certain factors, such as the still-unknown and evolving scope of the exchange activities CMS will be required to perform in each state, and the large numbers of activities remaining to be performed--some close to the start of enrollment--suggest a potential for implementation challenges going forward. And while the missed interim deadlines may not affect implementation, additional missed deadlines closer to the start of enrollment could do so. CMS recently completed risk assessments and plans for mitigating identified risks associated with the data hub, and is also working on strategies to address state preparedness contingencies. Whether CMS's contingency planning will assure the timely and smooth implementation of the exchanges by October 2013 cannot yet be determined. We received comments from HHS on a draft of this report (see app. II). HHS emphasized the progress it has made in establishing exchanges since PPACA became law, and expressed its confidence that on October 1, 2013, exchanges will be open and functioning in every state. HHS also provided technical comments, which we incorporated as appropriate. We are sending copies of this report to the Secretary of Health and Human Services and other interested parties. In addition, the report will be available at no charge on the GAO website at http://www.gao.gov. If you or your staff have questions about this report, please contact John E. Dicken 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 major contributions to this report are listed in appendix III. Table 5 provides information on the amounts the Department of Health and Human Services' (HHS) Centers for Medicare & Medicaid Services (CMS) obligated for contract activities to support the establishment of the federally facilitated exchanges (FFE) and the data hub and carry out certain other exchange-related activities by individual contractors. The funds were obligated from fiscal year 2010 through March 31, 2013. The information presented in this table was obtained from CMS. Due to the large number of contractors, we did not edit the information to correct typographical or grammatical errors, or clarify the information provided. We reprinted the abbreviations and acronyms provided by CMS. In addition to the contact name above, Randy Dirosa and Teresa Tucker, Assistant Directors; Tonia Brown; Sandra George; Jawaria Gilani; William Hadley; Thomas Murphy; and Laurie Pachter made key contributions to this report.

The Patient Protection and Affordable Care Act required the establishment in all states of exchanges--marketplaces where eligible individuals can compare and select health insurance plans. CMS must oversee the establishment of exchanges, including approving states to operate one or establishing and operating one itself in states that will not do so. CMS will approve states to assist it in carrying out certain FFE functions. CMS will also operate an electronic data hub to provide eligibility information to the exchanges and state agencies. Enrollment begins on October 1, 2013, with coverage effective January 1, 2014. GAO was asked to examine CMS's role and preparedness to establish FFEs and the data hub. In this report, GAO describes (1) the federal government's role in establishing FFEs for operation in 2014 and state participation in that effort; and (2) the status of federal and state actions taken and planned for FFEs and the data hub. GAO reviewed regulations and guidance issued by CMS and documents indicating the activities that the federal government and states are expected to carry out for these exchanges. GAO also reviewed planning documents CMS used to track the implementation of federal and state activities, including documents describing the development and implementation of the data hub. GAO also interviewed CMS officials responsible for establishment of the exchanges. GAO relied largely on documentation provided by CMS--including information CMS developed based on its contacts with the states--regarding the status of the exchanges and did not interview or collect information directly from states. The Centers for Medicare & Medicaid Services (CMS) will operate a health insurance exchange in the 34 states that will not operate a state-based exchange for 2014. Of these 34 federally facilitated exchanges (FFE), 15 are in states expected to assist CMS in carrying out certain FFE functions. However, the activities that CMS plans to carry out in these 15 exchanges, as well as in the state-based exchanges, have evolved and may continue to change. For example, CMS approved states' exchange arrangements on the condition that they ultimately complete activities necessary for exchange implementation. CMS indicated that it would carry out more exchange functions if any state did not adequately progress towards implementation of all required activities. CMS completed many activities necessary to establish FFEs by October 1, 2013, although many remain to be completed and some were behind schedule. CMS issued numerous regulations and guidance and took steps to establish processes and data systems necessary to operate the exchanges. The activities remaining cross the core exchange functional areas of eligibility and enrollment, plan management, and consumer assistance. To support consumer-eligibility determinations, for example, CMS is developing a data hub that will provide electronic, near real-time access to federal data, as well as provide access to state and third party data sources needed to verify consumer-eligibility information. While CMS has met project schedules, several critical tasks, such as final testing with federal and state partners, remain to be completed. For plan management, CMS must review and certify the qualified health plans (QHP) that will be offered in the FFEs. Though the system used to submit applications for QHP certification was operational during the anticipated time frame, several key tasks regarding plan management, including certification of QHPs and inclusion of QHP information on the exchange websites, remain to be completed. In the case of consumer assistance, for example, funding awards for Navigators--a key consumer assistance program--have been delayed by about 2 months, which has delayed training and other activities. CMS is also depending on the states to implement specific FFE exchange functions, and CMS data show that many state activities remained to be completed and some were behind schedule. Much progress has been made, but much remains to be accomplished within a relatively short amount of time. CMS's timelines provide a roadmap to completion; however, factors such as the still-evolving scope of CMS's required activities in each state and the many activities yet to be performed--some close to the start of enrollment--suggest a potential for challenges going forward. And while the missed interim deadlines may not affect implementation, additional missed deadlines closer to the start of enrollment could do so. CMS recently completed risk assessments and plans for mitigating risks associated with the data hub, and is also working on strategies to address state preparedness contingencies. Whether these efforts will assure the timely and smooth implementation of the exchanges by October 2013 cannot yet be determined. In commenting on a draft of this report, the Department of Health and Human Services emphasized the progress it has made in establishing exchanges, and expressed its confidence that exchanges will be open and functioning in every state by October 1, 2013.

National security threats have evolved and require involvement beyond the traditional agencies of DOD, the Department of State, and USAID. The Departments of Homeland Security, Energy, Justice, the Treasury, Agriculture, Commerce, and Health and Human Services are now a bigger part of the equation. What has not yet evolved are the mechanisms that agencies use to coordinate national security activities such as developing overarching strategies to guide planning and execution of missions, or sharing and integrating national security information across agencies. The absence of effective mechanisms can be a hindrance to achieving national security objectives. Within the following key areas, a number of challenges exist that limit the ability of U.S. government agencies to work collaboratively in responding to national security issues. Our work has also identified actions that agencies can take to enhance collaboration. Although some agencies have developed or updated overarching strategies on national security-related issues, our work has identified cases where U.S. efforts have been hindered by the lack of information on roles and responsibilities of organizations involved or the lack of mechanisms to coordinate their efforts. National security challenges covering a broad array of areas, ranging from preparedness for an influenza pandemic to Iraqi governance and reconstruction, have necessitated using all elements of national power--including diplomatic, military, intelligence, development assistance, economic, and law enforcement support. These elements fall under the authority of numerous U.S. government agencies, requiring overarching strategies and plans to enhance agencies' abilities to collaborate with each other. Strategies can help agencies develop mutually reinforcing plans and determine activities, resources, processes, and performance measures for implementing those strategies. The Government Performance and Results Act (GPRA) provides a strategic planning and reporting framework intended to improve federal agencies' performance and hold them accountable for achieving results. Effective implementation of GPRA's results-oriented framework requires, among other things, that agencies clearly establish performance goals for which they will be held accountable, measure progress towards those goals, and determine strategies and resources to effectively accomplish the goals. Furthermore, defining organizational roles and responsibilities and mechanisms for coordination in these strategies can help agencies clarify who will lead or participate in which activities and how decisions will be made. It can also help them organize their individual and joint efforts, and address how conflicts would be resolved. Our prior work, as well as that by national security experts, has found that strategic direction is required as a foundation for collaboration toward national security goals. We have found that, for example, in the past, multiple agencies, including the State Department, USAID, and DOD, led separate efforts to improve the capacity of Iraq's ministries to govern, without overarching direction from a lead entity to integrate their efforts. Since 2007, we have testified and reported that the lack of an overarching strategy contributed to U.S. efforts not meeting the goal for key Iraqi ministries to develop the capacity to effectively govern and assume increasing responsibility for operating, maintaining, and further investing in reconstruction projects. We recommended that the Department of State, in consultation with the Iraqi government, complete an overall strategy for U.S. efforts to develop the capacity of the Iraqi government. State recognized the value of such a strategy but expressed concern about conditioning further capacity development investment on completion of such a strategy. Moreover, our work on the federal government's pandemic influenza preparedness efforts found that the Departments of Homeland Security and Health and Human Services share most federal leadership roles in implementing the pandemic influenza strategy and supporting plans; however, we reported that it was not clear how this would work in practice because their roles are unclear. The National Strategy for Pandemic Influenza and its supporting implementation plan describes the Secretary of Health and Human Services as being responsible for leading the medical response in a pandemic, while the Secretary of Homeland Security would be responsible for overall domestic incident management and federal coordination. However, since a pandemic extends well beyond health and medical boundaries--to include sustaining critical infrastructure, private-sector activities, the movement of goods and services across the nation and the globe, and economic and security considerations--it is not clear when, in a pandemic, the Secretary of Health and Human Services would be in the lead and when the Secretary of Homeland Security would lead. This lack of clarity on roles and responsibilities could lead to confusion or disagreements among implementing agencies that could hinder interagency collaboration. Furthermore, a federal response could be slowed as agencies resolve their roles and responsibilities following the onset of a significant outbreak. We have also issued reports recommending that U.S. government agencies, including DOD, the State Department, and others, develop or revise strategies to incorporate desirable characteristics for strategies for a range of programs and activities. These include humanitarian and development efforts in Somalia, the Trans-Sahara Counterterrorism Partnership, foreign assistance strategy, law enforcement agencies' role in assisting foreign nations in combating terrorism, and meeting U.S. national security goals in Pakistan's Federally Administered Tribal Areas. In commenting on drafts of those reports, agencies generally concurred with our recommendations. Officials from one organization--the National Counterterrorism Center--noted that at the time of our May 2007 report on law enforcement agencies' role in assisting foreign nations in combating terrorism, it had already begun to implement our recommendations. Organizational differences--including differences in agencies' structures, planning processes, and funding sources--can hinder interagency collaboration. Agencies lack adequate coordination mechanisms to facilitate this collaboration during planning and execution of programs and activities. U.S. government agencies, such as the Department of State, USAID, and DOD, among others, spend billions of dollars annually on various diplomatic, development, and defense missions in support of national security. Achieving meaningful results in many national security- related interagency efforts requires coordinated efforts among various actors across federal agencies; foreign, state, and local governments; nongovernment organizations; and the private sector. Given the number of agencies involved in U.S. government national security efforts, it is important that there be mechanisms to coordinate across agencies. Without such mechanisms, the results can be a patchwork of activities that waste scarce funds and limit the overall effectiveness of federal efforts. A good example of where agencies involved in national security activities define and organize their regions differently involves DOD's regional combatant commands and the State Department's regional bureaus. Both are aligned differently in terms of the geographic areas they cover, as shown in figure 1. As a result of differing structures and areas of coverage, coordination becomes more challenging and the potential for gaps and overlaps in policy implementation is greater. Moreover, funding for national security activities is budgeted for and appropriated by agency, rather than by functional area (such as national security), resulting in budget requests and congressional appropriations that tend to reflect individual agency concerns. Given these differences, it is important that there be mechanisms to coordinate across agencies. In addition to regional bureaus, the State Department is organized to interact through U.S. embassies located within other countries. As a result of these differing structures, our prior work and that of national security experts has found that agencies must coordinate with a large number of organizations in their regional planning efforts, potentially creating gaps and overlaps in policy implementation and leading to challenges in coordinating efforts among agencies. Given the differences among U.S. government agencies, developing adequate coordination mechanisms is critical to achieving integrated approaches. In some cases, agencies have established effective mechanisms. For example, DOD's U.S. Africa Command had undertaken efforts to integrate personnel from other U.S. government agencies into its command structure because the command is primarily focused on strengthening security cooperation with African nations and creating opportunities to bolster the capabilities of African partners, which are activities that traditionally require coordination with other agencies. However, in other cases, challenges remain. For example, we reported in May 2007 that DOD had not established adequate mechanisms to facilitate and encourage interagency participation in the development of military plans developed by the combatant commanders. Furthermore, we noted that inviting interagency participation only after plans have been formulated is a significant obstacle to achieving a unified government approach in the planning effort. In that report, we suggested that Congress require DOD to develop an action plan and report annually on steps being taken to achieve greater interagency participation in the development of military plans. Moreover, we reported in March 2010 that DOD has many strategy, policy, and guidance documents on interagency coordination of its homeland defense and civil support mission; however, DOD entities do not have fully or clearly defined roles and responsibilities because key documents are outdated, are not integrated, or are not comprehensive. More specifically, conflicting directives assigned overlapping law enforcement support responsibilities to three different DOD entities, creating confusion as to which DOD office is actually responsible for coordinating with law enforcement agencies. DOD's approach to identifying roles and responsibilities and day-to-day coordination processes could also be improved by providing relevant information in a single, readily-accessible source. This source could be accomplished through a variety of formats such as a handbook or a Web-based tool and could provide both DOD and other agencies a better understanding of each other as federal partners and enable a unified and institutionalized approach to interagency coordination. We recommended, and DOD agreed, that the department update and integrate its strategy, policy, and guidance; develop a partner guide; and implement key practices for management of homeland defense and civil support liaisons. We have reported other instances in which mechanisms are not formalized or fully utilized. For example, we found that collaboration between DOD's Northern Command and an interagency planning team on the development of the command's homeland defense plan was largely based on the dedicated personalities involved and informal meetings. Without formalizing and institutionalizing the interagency planning structure, we concluded efforts to coordinate may not continue when personnel move on to their next assignments. We made several recommendations, and DOD generally concurred, that the department take several actions to address the challenges it faces in its planning and interagency coordination efforts. In recent years we have issued reports recommending that the Secretaries of Defense, State, and Homeland Security and the Attorney General take a variety of actions to address creating collaborative organizations, including taking actions to provide implementation guidance to facilitate interagency participation and develop clear guidance and procedures for interagency efforts, develop an approach to overcome differences in planning processes, create coordinating mechanisms, and clarify roles and responsibilities. In commenting on drafts of those reports, agencies generally concurred with our recommendations. In some cases, agencies identified planned actions to address the recommendations. For example, in our April 2008 report on U.S. Northern Command's plans, we recommended that clear guidance be developed for interagency planning efforts, and DOD stated that it had begun to incorporate such direction in its major planning documents and would continue to expand on this guidance in the future. Federal agencies do not always have the right people with the right skills in the right jobs at the right time to meet the challenges they face, to include having a workforce that is able to quickly address crises. As the threats to national security have evolved over the past decades, so have the skills needed to prepare for and respond to those threats. To effectively and efficiently address today's national security challenges, federal agencies need a qualified, well-trained workforce with the skills and experience that can enable them to integrate the diverse capabilities and resources of the U.S. government. Our work has found that personnel often lack knowledge of the processes and cultures of the agencies with which they must collaborate. Some federal government agencies lack the personnel capacity to fully participate in interagency activities and some agencies do not have the necessary capabilities to support their national security roles and responsibilities. For example, in June 2009, we reported that DOD lacks a comprehensive strategic plan for addressing its language skills and regional proficiency capabilities. Moreover, as of September 2009, we found that 31 percent of the State Department's generalists and specialists in language-designated positions did not meet the language requirements for their positions, an increase from 29 percent in 2005. Similarly, we reported in September 2008 that USAID officials at some overseas missions told us that they did not receive adequate and timely acquisition and assistance support at times, in part because the numbers of USAID staff were insufficient or because the USAID staff lacked necessary competencies. We also reported in February 2009 that U.S. Africa Command has faced difficulties integrating interagency personnel into its command. According to DOD and Africa Command officials, integrating personnel from other U.S. government agencies is essential to achieving Africa Command's mission because it will help the command develop plans and activities that are more compatible with those agencies. However, the State Department, which faced a 25 percent shortfall in midlevel personnel, told Africa Command that it likely would not be able to fill the command's positions due to personnel shortages. DOD has a significantly larger workforce than other key agencies involved in national security activities as shown in figure 2. Furthermore, agencies' personnel systems often do not recognize or reward interagency collaboration, which could diminish agency employees' interest in serving in interagency efforts. In June 2009 we reviewed compensation policies for six agencies that deployed civilian personnel to Iraq and Afghanistan, and reported that variations in policies for such areas as overtime rate, premium pay eligibility, and deployment status could result in monetary differences of tens of thousands of dollars per year. The Office of Personnel Management acknowledged that laws and agency policy could result in federal government agencies paying different amounts of compensation to deployed civilians at equivalent pay grades who are working under the same conditions and facing the same risks. In another instance, we reported in April 2009 that officials from the Departments of Commerce, Energy, Health and Human Services, and the Treasury stated that providing support for State Department foreign assistance program processes creates an additional workload that is neither recognized by their agencies nor included as a factor in their performance ratings. Various tools can be useful in helping agencies to improve their ability to more fully participate in collaboration activities. For example, increasing training opportunities can help personnel develop the skills and understanding of other agencies' capabilities. We have previously testified that agencies need to have effective training and development programs to address gaps in the skills and competencies that they identified in their workforces. Moreover, we issued a report in April 2010 on DOD's Horn of Africa task force, which found that DOD personnel did not always understand U.S. embassy procedures in carrying out their activities. This resulted in a number of cultural missteps in Africa because personnel did not understand local religious customs and may have unintentionally burdened embassies that must continuously train new staff on procedures. We recommended, and DOD agreed, that the department develop comprehensive training guidance or a program that augments personnel's understanding of African cultural awareness and working with interagency partners. Training and developing personnel to fill new and different roles will play a crucial part in the federal government's endeavors to meet its transformation challenges. Also, focusing on strategic workforce planning can support agencies' efforts to secure the personnel resources needed to collaborate in interagency missions. We have found that tools like strategic workforce planning and human capital strategies are integral to managing resources as they enable an agency to define staffing levels, identify critical skills needed to achieve its mission, and eliminate or mitigate gaps between current and future skills and competencies. In recent years we have recommended that the Secretaries of State and Defense, the Administrator of USAID, and the U.S. Trade Representative take a variety of actions to address the human capital issues discussed above, such as staffing shortfalls, training, and strategic planning. Specifically, we have made recommendations to develop strategic human capital management systems and undertake strategic human capital planning, include measurable goals in strategic plans, identify the appropriate mix of contractor and government employees needed and develop plans to fill those needs, seek formal commitments from contributing agencies to provide personnel to meet interagency personnel requirements, develop alternative ways to obtain interagency perspectives in the event that interagency personnel cannot be provided due to resource limitations, develop and implement long-term workforce management plans, and implement a training program to ensure employees develop and maintain needed skills. In commenting on drafts of those reports, agencies generally concurred with our recommendations. In some cases, agencies identified planned actions to address the recommendations. For example, in our April 2009 report on foreign aid reform, we recommended that the State Department develop a long-term workforce management plan to periodically assess its workforce capacity to manage foreign assistance. The State Department noted in its comments that it concurred with the idea of further improving employee skill sets and would work to encourage and implement further training. U.S. government agencies do not always share relevant information with their national security partners due to a lack of clear guidelines for sharing information and security clearance issues. The timely dissemination of information is critical for maintaining national security. Federal, state, and local governments and private-sector partners are making progress in sharing terrorism-related information. For example, we reported in October 2007 that most states and many local governments had established fusion centers--collaborative efforts to detect, prevent, investigate, and respond to criminal and terrorist activity--to address gaps in information sharing. However, we found that non-DOD personnel could not access some DOD planning documents or participate in planning sessions because they may not have had the proper security clearances. Moreover, because of concerns about agencies' ability to protect shared information or use that information properly, other agencies and private- sector partners may be hesitant to share information. For example, we have reported that Department of Homeland Security officials expressed concerns about sharing terrorism-related information with state and local partners because such information had occasionally been posted on public Internet sites or otherwise compromised. To facilitate information sharing, it is important to establish clear guidelines, agreements, and procedures that govern key aspects, such as how information will be communicated, who will participate in interagency information sharing efforts, and how information will be protected. When agencies do share information, managing and integrating information from multiple sources presents challenges regarding redundancies in information sharing, unclear roles and responsibilities, and data comparability. For example, we reported in December 2008 that in Louisiana, reconstruction project information had to be repeatedly resubmitted separately to state and Federal Emergency Management Agency officials during post-Hurricane Katrina reconstruction efforts because the system used to track project information did not facilitate the exchange of documents. Information was sometimes lost during this exchange, requiring state officials to resubmit the information, creating redundancies and duplication of effort. As a result, reconstruction efforts in Louisiana were delayed. In another instance, we reported in October 2008 that biometric data, such as fingerprints and iris images, collected in DOD field activities such as those in Iraq and Afghanistan, were not comparable with data collected by other units or with large federal databases that store biometric data, such as the Department of Homeland Security biometric database or the Federal Bureau of Investigation (FBI) fingerprint database. A lack of comparable data, especially for use in DOD field activities, prevents agencies from determining whether the individuals they encounter are friend, foe, or neutral, and may put forces at risk. Since 2005, we have recommended that the Secretaries of Defense, Homeland Security, and State establish or clarify guidelines, agreements, or procedures for sharing a wide range of national security information, such as planning information, terrorism-related information, and reconstruction project information. We have recommended that such guidelines, agreements, and procedures define and communicate how shared information will be protected; include provisions to involve and obtain information from nonfederal partners in the planning process; ensure that agencies fully participate in interagency information- sharing efforts; identify and disseminate practices to facilitate more effective communication among federal, state, and local agencies; clarify roles and responsibilities in the information-sharing process; and establish baseline standards for data collecting to ensure comparability across agencies. In commenting on drafts of those reports, agencies generally concurred with our recommendations. In some cases, agencies identified planned actions to address the recommendations. For example, in our December 2008 report on the Federal Emergency Management Agency's public assistance grant program, we recommended that the Federal Emergency Management Agency improve information sharing within the public assistance process by identifying and disseminating practices that facilitate more effective communication among federal, state, and local entities. In comments on a draft of the report, the Federal Emergency Management Agency generally concurred with the recommendation and noted that it was making a concerted effort to improve collaboration and information sharing within the public assistance process. Moreover, agencies have implemented some of our past recommendations. For example, in our April 2006 report on protecting and sharing critical infrastructure information, we recommended that the Department of Homeland Security define and communicate to the private sector what information is needed and how the information would be used. The Department of Homeland Security concurred with our recommendation and, in response, has made available, through its public Web site, answers to frequently asked questions that define the type of information collected and what it is used for, as well as how the information will be accessed, handled, and used by federal, state, and local government employees and their contractors. Underlying the success of these key areas for enhancing interagency collaboration for national security-related activities is committed and effective leadership. Our prior work has shown that implementing large- scale change management initiatives or transformational change--which is what these key areas should be considered--are not simple endeavors and require the concentrated efforts of leadership and employees to realize intended synergies and to accomplish new goals. Leadership must set the direction, pace, and tone and provide a clear, consistent rationale for the transformation. Sustained and inspired attention is needed to overcome the many barriers to working across agency boundaries. For example, leadership is important in establishing incentives to promote employees' interest in serving in interagency efforts. The 2010 National Security Strategy calls for a renewed emphasis on building a stronger leadership foundation for the long term to more effectively advance our interests in the 21st century. Moreover, the strategy identifies key steps for improving interagency collaboration. These steps include more effectively ensuring alignment of resources with our national security strategy, adapting the education and training of national security professionals to equip them to meet modern challenges, reviewing authorities and mechanisms to implement and coordinate assistance programs, and other policies and programs that strengthen coordination. National security experts also note the importance of and need for effective leadership for national security issues. For example, a 2008 report by the Project on National Security Reform notes that the national security system requires skilled leadership at all levels and, to enhance interagency coordination, these leaders must be adept at forging links and fostering partnerships all levels. Strengthening interagency collaboration--with leadership as the foundation--can help transform U.S. government agencies and create a more unified, comprehensive approach to national security issues at home and abroad. Mr. Chairman, this concludes my prepared remarks. I would be pleased to respond to any questions you or other Members of the Subcommittee may have. For future information regarding this statement, please contact John H. Pendleton at (202) 512-3489 or at [email protected]. Contact points for our Offices of Congressional Relations and Public Affairs can be found on the last page of this statement. Key contributors to this statement are listed in appendix II. Defense Management: DOD Needs to Determine the Future of Its Horn of Africa Task Force, GAO-10-504, Washington, D.C.: Apr. 15, 2010. Homeland Defense: DOD Needs to Take Actions to Enhance Interagency Coordination for Its Homeland Defense and Civil Support Missions, GAO-10-364, Washington, D.C.: Mar. 30, 2010. Interagency Collaboration: Key Issues for Congressional Oversight of National Security Strategies, Organizations, Workforce, and Information Sharing, GAO-09-904SP, Washington, D.C.: Sept. 25, 2009. Military Training: DOD Needs a Strategic Plan and Better Inventory and Requirements Data to Guide Development of Language Skills and Regional Proficiency. GAO-09-568. Washington, D.C.: June 19, 2009. Influenza Pandemic: Continued Focus on the Nation's Planning and Preparedness Efforts Remains Essential. GAO-09-760T. Washington, D.C.: June 3, 2009. U.S. Public Diplomacy: Key Issues for Congressional Oversight. GAO-09-679SP. Washington, D.C.: May 27, 2009. Military Operations: Actions Needed to Improve Oversight and Interagency Coordination for the Commander's Emergency Response Program in Afghanistan. GAO-09-61. Washington, D.C.: May 18, 2009. Foreign Aid Reform: Comprehensive Strategy, Interagency Coordination, and Operational Improvements Would Bolster Current Efforts. GAO-09-192. Washington, D.C.: Apr. 17, 2009. Iraq and Afghanistan: Security, Economic, and Governance Challenges to Rebuilding Efforts Should Be Addressed in U.S. Strategies. GAO-09-476T. Washington, D.C.: Mar. 25, 2009. Drug Control: Better Coordination with the Department of Homeland Security and an Updated Accountability Framework Can Further Enhance DEA's Efforts to Meet Post-9/11 Responsibilities. GAO-09-63. Washington, D.C.: Mar. 20, 2009. Defense Management: Actions Needed to Address Stakeholder Concerns, Improve Interagency Collaboration, and Determine Full Costs Associated with the U.S. Africa Command. GAO-09-181. Washington, D.C.: Feb. 20, 2009. Combating Terrorism: Actions Needed to Enhance Implementation of Trans-Sahara Counterterrorism Partnership. GAO-08-860. Washington, D.C.: July 31, 2008. Information Sharing: Definition of the Results to Be Achieved in Terrorism-Related Information Sharing Is Needed to Guide Implementation and Assess Progress. GAO-08-637T. Washington, D.C.: July 23, 2008. Highlights of a GAO Forum: Enhancing U.S. Partnerships in Countering Transnational Terrorism. GAO-08-887SP. Washington, D.C.: July 2008. Stabilization and Reconstruction: Actions Are Needed to Develop a Planning and Coordination Framework and Establish the Civilian Reserve Corps. GAO-08-39. Washington, D.C.: Nov. 6, 2007. Homeland Security: Federal Efforts Are Helping to Alleviate Some Challenges Encountered by State and Local Information Fusion Centers. GAO-08-35. Washington, D.C.: Oct. 30, 2007. Military Operations: Actions Needed to Improve DOD's Stability Operations Approach and Enhance Interagency Planning. GAO-07-549. Washington, D.C.: May 31, 2007. Combating Terrorism: Law Enforcement Agencies Lack Directives to Assist Foreign Nations to Identify, Disrupt, and Prosecute Terrorists. GAO-07-697. Washington, D.C.: May 25, 2007. Results-Oriented Government: Practices That Can Help Enhance and Sustain Collaboration among Federal Agencies. GAO-06-15. Washington, D.C.: Oct. 21, 2005. In addition to the contact name above, Marie Mak, Assistant Director; Laurie Choi; Alissa Czyz; Rebecca Guerrero; and Jodie Sandel made key contributions to this testimony. 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.

Recent terrorist events such as the attempted bomb attacks in New York's Times Square and aboard an airliner on Christmas Day 2009 are reminders that national security challenges have expanded beyond the traditional threats of the Cold War Era to include unconventional threats from nonstate actors. Today's threats are diffuse and ambiguous, making it difficult--if not impossible--for any single federal agency to address them alone. Effective collaboration among multiple agencies and across federal, state, and local governments is critical. This testimony highlights opportunities to strengthen interagency collaboration by focusing on four key areas: (1) developing overarching strategies, (2) creating collaborative organizations, (3) developing a well-trained workforce, and (4) improving information sharing. It is based on GAO's body of work on interagency collaboration. Federal agencies have an opportunity to enhance collaboration by addressing long-standing problems and better positioning the U.S. government to respond to changing conditions and future uncertainties. Progress has been made in enhancing interagency collaboration, but success will require leadership commitment, sound plans that set clear priorities, and measurable goals. The agencies involved in national security will need to make concerted efforts to forge strong and collaborative partnerships, and seek coordinated solutions that leverage expertise and capabilities across communities. Today, challenges exist in four key areas: 1) Developing and implementing overarching strategies. Although some agencies have developed or updated overarching strategies on national security-related issues, GAO's work has identified cases where U.S. efforts have been hindered by the lack of information on roles and responsibilities of organizations involved or coordination mechanisms. 2) Creating collaborative organizations. Organizational differences--including differences in agencies' structures, planning processes, and funding sources--can hinder interagency collaboration. Agencies lack adequate coordination mechanisms to facilitate this collaboration during planning and execution of programs and activities. 3) Developing a well-trained workforce. Agencies do not always have the right people with the right skills in the right jobs at the right time to meet the challenges they face--including having a workforce that is able to quickly address crises. Moreover, agency performance management systems often do not recognize or reward interagency collaboration, and training is needed to understand other agencies' processes or cultures. 4) Sharing and integrating national security information across agencies. U.S. government agencies do not always share relevant information with their national security partners due to a lack of clear guidelines for sharing information and security clearance issues. Additionally, incorporating information drawn from multiple sources poses challenges to managing and integrating that information. Strengthening interagency collaboration--with leadership as the foundation--can help transform U.S. government agencies and create a more unified, comprehensive approach to national security issues at home and abroad.

Since the 1940s, VA has provided vocational rehabilitation assistance to veterans with service-connected disabilities to help them find meaningful work and achieve maximum independence in daily living. In 1980, the Congress enacted the Veterans' Rehabilitation and Education Amendments, which changed the focus of VA's vocational rehabilitation program from providing primarily training aimed at improving the employability of disabled veterans to helping them find and maintain suitable jobs. VA estimates that in fiscal year 2004 it spent more than $670 million on its VR&E program to serve about 73,000 participants. This amount represents about 2 percent of VA's $37 billion budget for nonmedical benefits, most of which involves cash compensation for service connected disabilities. VR&E services include vocational counseling, evaluation, and training that can include payment for tuition and other expenses for education, as well as job placement assistance. Interested veterans generally apply for VR&E services after they have applied and qualified for disability compensation based on a rating of their service-connected disability. This disability rating--ranging from 0 to 100 percent in 10 percent increments--entitles veterans to monthly cash payments based on their average loss in earning capacity resulting from a service-connected injury or combination of injuries. To be entitled to VR&E services, veterans with disabilities generally must have a 20 percent disability rating and an employment handicap as determined by a vocational rehabilitation counselor. Although cash compensation is not available to servicemembers until after they separate from the military, they can receive VR&E services prior to separation under certain circumstances. To make these services available prior to discharge, VA expedites the determination of eligibility for VR&E by granting a preliminary rating, known as a memorandum rating. We generally agree with the Task Force's key findings, which broadly address three areas of VR&E's operations. (See table 1.) First, the Task Force found that VR&E has not been a priority in terms of returning veterans with service-connected disabilities to the workforce. Between 1984 and 1998, we issued three reports all of which found that the VR&E program had not emphasized its mandate to find jobs for disabled veterans. In 1992, we found that over 90 percent of eligible veterans went directly into education programs, while less than 3 percent went into the employment services phase. We also found that VA placed few veterans in suitable jobs. We reported in 1996 that VA rehabilitated less than 10 percent of veterans found eligible for vocational rehabilitation services and recommended switching the focus to obtaining suitable employment for disabled veterans. VA program officials told us that staff focused on providing training services because, among other reasons, the staff was not prepared to provide employment services because it lacked adequate training and expertise in job placement. Years later, the Task Force similarly reported that top VR&E management had not demonstrated a commitment to providing employment services and lacked the staffing and skill resources at the regional offices to provide these services. The Task Force also found that VR&E has a limited capacity to manage its growing workload. The Task Force had concerns about, among other things, VR&E's organizational, program, and fiscal accountability; workforce and workload management; information and systems technology; and performance measures. In our report on the Task Force, we stated that, although we have not specifically reviewed VR&E's capacity to manage its workload, we agree that many of the VR&E management systems identified by the Task Force as needing improvement are fundamental to the proper functioning of federal programs, regardless of workload. In addition, the Task Force found that the VR&E system must be redesigned for the 21st century employment environment. The Task Force reported that the VR&E program does not reflect the dynamic nature of the economic environment and constant changes in the labor market. The report suggested that, as a result, only about 10 percent of veterans participating in the VR&E program had obtained employment. We agree with the Task Force finding that the VR&E system needs to be modernized. Our high risk report emphasized that outmoded criteria used to establish eligibility need to be updated. The Task Force made 105 recommendations, which we grouped into six categories. (See table 2.) The first category of recommendations was directed at streamlining VR&E program eligibility and entitlement for veterans in most critical need, including (1) servicemembers who have been medically discharged or are pending medical discharge; (2) veterans with a combined service-connected disability rating of 50 percent or greater; and (3) veterans receiving compensation for the loss, or loss of the use, of a limb. In our report, we commented that, among other things, VA's outmoded disability criteria raise questions about the validity of its disability decisions because medical conditions alone are generally poor predictors of work incapacity. For example, advances in prosthetics and technology for workplace accommodations can enhance work capacity by compensating for impairments. As a result, the Task Force recommendation to focus on severity of disability rather than on employability may not ensure that veterans with the most severe employment handicaps receive priority services from VR&E. Second, the Task Force sought to replace the current VR&E process with a 5-track employment-driven service delivery system. The five tracks include rapid access employment for veterans with skills, self-employment, re- employment at a job held before military service, traditional vocational rehabilitation services and, when employment is not a viable option, independent living services. We commented that the 5-track process could help VR&E focus on employment while permitting the agency to assist veterans less likely to obtain gainful employment on their own. We added, however, that the new system would require a cultural shift from the program's current emphasis on long-term education to more rapid employment. We also observed that, as long as the education benefits available under VR&E provide more financial assistance than those available through other VA educational benefits programs, eligible veterans will have strong incentives to continue to use VR&E to pursue their education goals. Third, the Task Force recommended that VR&E expand counseling benefits to provide VR&E services to servicemembers before they are discharged and to veterans who have already transitioned out of the military. We agreed that providing vocational and employment counseling prior to military discharge is essential to enable disabled servicemembers to access VR&E services as quickly as possible after they are discharged. In prior reports, we highlighted the importance of early intervention efforts to promote and facilitate return to the workplace. In 1996, for example, we reported research findings that rehabilitation offered as close as possible to the onset of disabling impairments has the greatest likelihood of success. In addition, receptiveness to participate in rehabilitation and job placement activities can decline after extended absence from work. Fourth, the Task Force made several recommendations directed at redesigning the VR&E central office to provide greater oversight of regional office operations and to increase staff and skill sets to reflect the new focus on employment. We agreed that program accountability could be enhanced through more central office oversight. We pointed out that, over the past 3 years, VA Inspector General reports had identified VR&E programs at regional offices that did not adhere to policies and procedures and sometimes circumvented accountability mechanisms, such as those for managing and monitoring veterans' cases and those requiring the development of sound plans prior to approving purchases for those veterans seeking self-employment. Fifth, the Task Force recommended that VR&E improve the capacity of its information technology systems. Many of the Task Force's recommendations in this area are consistent with GAO's governmentwide work reporting that agencies need to strengthen strategic planning and investment management in information technology. In addition, we recognized that VR&E would benefit from a more systematic analysis of current information technology systems before making further investment in its current systems. Finally, the Task Force recommended that VR&E strengthen coordination within VA between VR&E and the Veterans Health Administration, and between VR&E and the Departments of Defense (DOD) and Labor. Improving coordination with agencies that have a role in assisting disabled veterans make the transition to civilian employment should help these agencies more efficiently use federal resources to enhance the employment prospects of disabled veterans. While VR&E responds to the Task Force recommendations, it faces immediate challenges associated with providing vocational rehabilitation and employment services to injured servicemembers returning from Afghanistan and Iraq. As we reported in January 2005, VR&E is challenged by the need to provide services on an early intervention basis; that is, expedited assistance provided on a high priority basis. VR&E also lacks the information technology systems needed to manage the provision of services to these servicemembers and to veterans. In addition, VR&E is only now beginning to use results-based criteria for measuring its success in assisting veterans achieve sustained employment. VR&E faces significant challenges in expediting services to disabled servicemembers. An inherent challenge is that individual differences and uncertainties in the recovery process make it difficult to determine when a seriously injured service member will be able to consider VR&E services. Additionally, as we reported in our January 2005 report, given that VA is conducting outreach to servicemembers whose discharge from military service is not yet certain, VA is challenged by DOD's concerns that VA's outreach about benefits, including early intervention with VR&E services, could adversely affect the military's retention goals. Finally, VA is currently challenged by a lack of access to DOD data that would, at a minimum, allow the agency to readily identify and locate all seriously injured servicemembers. VA officials we interviewed both in the regional offices and at central office reported that this information would provide them with a more reliable way to identify and monitor the progress of those servicemembers with serious injuries. However, DOD officials cited privacy concerns about the type of information VA had requested. Our January 2005 report found that VR&E could enhance employment outcomes for disabled servicemembers, especially if services could be provided early in the recovery process. Unlike previous conflicts, a greater portion of servicemembers injured in Afghanistan and Iraq are surviving their injuries--due, in part, to advanced protective equipment and in- theater medical treatment. Consequently, VR&E has greater opportunity to assist servicemembers in overcoming their impairments. While medical and technological advances are making it possible for some of these disabled servicemembers to return to military occupations, others will transition to veteran status and seek employment in the civilian economy. According to DOD officials, once stabilized and discharged from the hospital, servicemembers usually relocate to be closer to their homes or military bases and be treated as outpatients by the closest VA or military hospital. At this point, the military generally begins to assess whether the servicemember will be able to remain in the military--a process that could take months to complete. The process could take even longer if servicemembers appeal the military's initial disability decision. We also reported that VA had taken steps to expedite VR&E services for seriously injured servicemembers returning from Afghanistan and Iraq. Specifically, VA instructed its regional offices to make seriously injured servicemembers a high priority for all VA assistance. Because the most seriously injured servicemembers are initially treated at major military treatment facilities, VA also deployed staff to these sites to provide information on VA benefits programs, including VR&E services to servicemembers injured in Afghanistan and Iraq. Moreover, to better ensure the identification and monitoring of all seriously injured servicemembers, VA initiated a memorandum of agreement proposing that DOD systematically provide information on those servicemembers, including their names, location, and medical condition. Pending an agreement, VA instructed its regional offices to establish local liaison with military medical treatment facilities in their areas to learn who the seriously injured are, where they are located, and the severity of their injuries. Reliance on local relationships, however, has resulted in varying completeness and reliability of information. In addition, we found that VA had no policy for VR&E staff to maintain contact with seriously injured servicemembers who had not initially applied for VR&E services. Nevertheless, some regional offices reported efforts to maintain contact with these servicemembers, noting that some who are not initially ready to consider employment when contacted about VR&E services may be receptive at a future time. To improve VA's efforts to expedite VR&E services, we recommended that VA and DOD collaborate to reach an agreement for VA to have access to information that both agencies agree is needed to promote servicemembers' recovery to work. We also recommended that the Secretary of Veterans Affairs direct that Under Secretary for Benefits to develop a policy and procedures for regional offices to maintain contact with seriously injured servicemembers who do not initially apply for VR&E services, in order to ensure that they have the opportunity to participate in the program when they are ready. Both VA and DOD generally concurred with our findings and recommendations. GAO's governmentwide work has found that federal agencies need to strengthen strategic planning and investment management in information technology. The Task Force expressed particular concern that VR&E's information technology systems are not up to the task of producing the information and analyses needed to manage these and other activities. The Task Force pointed out that VR&E's mission-critical automated case- management system is based on a software application developed by four VA regional offices in the early 1990s and redesigned to operate in the Veterans Benefits Administration's information technology and network environments. The Task Force identified specific concerns with the operation of VR&E's automated case management system. For example, 52 of VR&E's 138 out- based locations cannot efficiently use the automated system because of VBA's policy to limit staff access to high-speed computer lines. As a result of this policy, many VR&E locations use dial-up modem capabilities, which can be unreliable and slow. The Task Force concluded that VR&E's automated system is so intertwined with the delivery of VR&E services that lack of reliable access and timely system response has degraded staff productivity and its ability to provide timely services to veterans. In addition, the Task Force pointed out that the number of reports that VR&E's automated case management system can generate is limited. For example, workload data available from the automated system provide only a snapshot of the veterans in the VR&E program at a given point in time. The automated system cannot link a veteran's case status with the fiscal year in which the veteran entered the program so that the performance of veterans entering the program in a fiscal year can be measured over a period of time. Also, the Task Force reported that VR&E does not have the capabilities it needs to track the number of veterans who drop out of the program or interrupt their rehabilitation plans. VA faces the challenge of using results-oriented criteria to measure the long-term success of the VR&E program. The Task Force recommended that VR&E develop a new outcomes-based performance measurement system to complement the proposed 5-track employment-driven service delivery system. Currently, VR&E still identifies veterans as having been successfully rehabilitated if they maintain gainful employment for 60 days. In its fiscal year 2004 performance and accountability report, VR&E included four employment-based performance measures: the percentage of participants employed during the first quarter (90 days) after leaving the program, the percentage still employed after the third quarter (270 days), the percentage change in earnings from pre-application to post-program, and the average cost of placing a participant in employment. However, as of February 2005, VR&E was still in the process of developing data for these measures and had not reported results. Until VR&E is farther along in this process, it will continue to measure performance using the 60-day criteria, which may not accurately predict sustained employment over the long-term. In 1993, we reported that the 60-day measure of success used by state vocational rehabilitation agencies may not be rigorous enough because gains in employment and earnings of clients who appeared to have been successfully rehabilitated faded after 2 years. Moreover, the earnings for many returned to pre-vocational rehabilitation level after 8 years. As VR&E further develops its four employment-based performance measures, it will also face challenges associated with coordinating its efforts with those of other federal agencies, including the Departments of Labor and Education, as they seek to develop common measures of vocational rehabilitation success. Mr. Chairman, this concludes my prepared remarks. I will be happy to answer any questions that you or other Members of the Subcommittee may have. For further information, please contact Cynthia A. Bascetta at (202) 512- 7215. Also contributing to this statement were Irene Chu and Joseph Natalicchio. VA Disability Benefits and Health Care: Providing Certain Services to the Seriously Injured Poses Challenges (GAO-05-444T, Mar. 17, 2005) Vocational Rehabilitation: More VA and DOD Collaboration Needed to Expedite Services for Seriously Injured Servicemembers (GAO-05-167, Jan. 14, 2005) VA Vocational Rehabilitation and Employment Program: GAO Comments on Key Task Force Findings and Recommendations (GAO-04- 853, Jun. 15, 2004) Vocational Rehabilitation: Opportunities to Improve Program Effectiveness (GAO/T-HEHS-98-87, Feb. 4, 1998) Veterans Benefits Administration: Focusing on Results in Vocational Rehabilitation and Education Programs (GAO/T-HEHS-97-148, Jun. 5, 1997) Vocational Rehabilitation: VA Continues to Place Few Disabled Veterans in Jobs (GAO/HEHS-96-155, Sept. 3, 1996) Vocational Rehabilitation: Evidence for Federal Program's Effectiveness Is Mixed, (GAO/PEMD-93-19, Aug. 27, 1993) Vocational Rehabilitation: VA Needs to Emphasize Serving Veterans With Serious Employment Handicaps (GAO/HRD-92-133, Sept. 28, 1992) VA Can Provide More Employment Assistance to Veterans Who Complete Its Vocational Rehabilitation Program (GAO/HRD-84-39, May 23, 1984) 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 Department of Veterans Affairs' Vocational Rehabilitation and Employment (VR&E) program has taken on heightened importance due, in large measure, to the number of servicemembers returning from Afghanistan and Iraq with serious injuries and their need for vocational rehabilitation and employment assistance. This statement draws on over 20 years of GAO's reporting on VA's provision of vocational rehabilitation and employment assistance to American veterans and focuses primarily on the results of two recent GAO reports. The first, issued in June 2004, commented on the report of the VA-sponsored VR&E Task Force, which performed a comprehensive review of VR&E activities and made extensive recommendations that, if implemented, would affect virtually every aspect of VR&E's operations. The second, issued in January 2005, focused on the steps VA has taken and the challenges it faces in providing services to seriously injured veterans returning from Afghanistan and Iraq. The past year has presented the Department of Veterans Affairs (VA) with an unprecedented opportunity to begin strengthening its provision of vocational rehabilitation and employment services to veterans. The VR&E Task Force has developed a blueprint for the changes needed to improve numerous programmatic and managerial aspects of VR&E's operations. We generally agree with the Task Force's three key findings. We also generally agree with the Task Force's key recommendations to streamline eligibility and entitlement, institute a new employment-driven service delivery process, expand counseling benefits, reorganize and increase VR&E staffing, and improve information technology capabilities and intra- and inter-agency coordination. VR&E faces three overriding challenges as it responds to the Task Force recommendations. First, providing early intervention assistance to injured servicemembers returning from Afghanistan and Iraq is complicated by (1) differences and uncertainties in the recovery process, which make it difficult for VR&E to determine when a servicemember will be able to consider its services; (2) the Department of Defense's (DOD) concerns that VA's outreach could work at cross purposes to the military's retention goals; and (3) lack of access to DOD data that would allow VA to readily identify and locate all seriously injured servicemembers. Second, VR&E needs to upgrade its information technology system. The Task Force report pointed out that VR&E's IT system is limited in its ability to produce useful reports. Third, VR&E needs to use new results-based criteria to evaluate and improve performance. The Task Force recommended that VR&E develop a new employment-oriented performance measurement system, including measures of sustained employment longer than 60 days. In fiscal year 2004, VR&E included four employment-based performance criteria in its performance and accountability report. However, as of February 2005, VR&E had not yet reported results using these longer-term measures.

Medicare is a federal program that helps pay for a variety of health care services and items on behalf of about 41 million elderly and disabled beneficiaries. Medicare part B covers DME for the beneficiary's use in the home, prosthetics, orthotics, and supplies if they are medically necessary and prescribed by a physician. Part B also covers certain outpatient prescription drugs that are used with DME or that are not usually self- administered by the patient. Some of these drugs are classified as supplies. In submitting claims for Medicare payment, suppliers use codes in the Healthcare Common Procedure Coding System (HCPCS) to identify DME, prosthetics, orthotics, and supplies that they are providing to beneficiaries. These codes are used for health insurance billing purposes to identify health care services, equipment, and supplies used in beneficiaries' diagnoses and treatments. Individual HCPCS codes used by suppliers can cover a broad range of items that serve the same general purpose, but vary in price, characteristics, and quality. The HCPCS National Panel, a group composed of CMS and other insurers, maintains the HCPCS codes. Medicare uses a variety of methodologies, which are specified in law, for determining what it will pay for specific types of DME, prosthetics, orthotics, and supplies. Medicare has established a fee schedule for DME and supplies, which lists the fees paid for these items in each state. Prosthetics and orthotics are paid according to 10 regional fee schedules. Prior to the passage of MMA, outpatient prescription drugs covered by Medicare part B were paid on a fee schedule based on 95 percent of the manufacturers' average wholesale price (AWP), a price determined by manufacturers themselves. Except for these outpatient prescription drugs, the amounts paid under the fee schedules are generally based on the amounts charged by suppliers in 1986 and 1987 (or the amount set by Medicare if the item was subsequently added to the fee schedule). Suppliers are reimbursed according to the supplier's actual charge or the Medicare fee schedule amount, whichever is lower. Over the years, we have reported that Medicare fees for certain medical equipment, supplies, and outpatient drugs were excessive compared with retail and other prices. For example, in 2000, we reported that retail price data collected by the four DME regional carriers showed that Medicare payments were much higher than the median surveyed retail prices for five commonly used medical products. While Medicare paid 5 percent less than AWP for covered prescription drugs, in 2001 we reported that prices widely available to physicians averaged from 13 percent to 34 percent less than AWP for a sample of physician-administered drugs. For two inhalation drugs covered by Medicare--albuterol and ipratropium bromide--prices widely available to pharmacy suppliers in 2001 reflected average discounts of 85 percent and 78 percent from AWP, respectively. In 1997, BBA required CMS to establish up to five demonstration projects to be operated over 3-year periods that used competitive bidding to set fees for Medicare part B items and services. BBA required that at least one demonstration project include oxygen and oxygen equipment; all demonstration areas be metropolitan statistical areas (MSA) or parts of MSAs; and criteria for selecting demonstration areas include availability and accessibility of services and probability of savings. CMS contracted with one of the four DME regional carriers--Palmetto Government Benefits Administrators (Palmetto)--to implement the competitive bidding demonstration for DME, prosthetics, orthotics, and supplies. The demonstration was implemented in two locations--Polk County, Florida, and the San Antonio, Texas, area. Two cycles of bidding took place in Polk County, with competitively set fees effective from October 1, 1999, to September 30, 2001, and from October 1, 2001, to September 30, 2002. There was one cycle of bidding in San Antonio, and competitively set fees were effective from February 1, 2001, to December 31, 2002. Bidding and implementation processes were similar at both locations. CMS set up competitive bidding for groups of related DME, prosthetics, orthotics, and supplies and held a separate competition for each group. Items included in the demonstration were identified by HCPCS codes. Suppliers were required to bid on each HCPCS code included in the product group in which they were competing. Table 1 shows the eight product groups in CMS's competitive bidding demonstration at the two locations. The competitive bidding process was used to determine the suppliers included in the demonstration and the rates they would be paid. From among the bidders, the agency and Palmetto selected multiple demonstration suppliers to provide items in each group of related products. These suppliers were not guaranteed that they would increase their business or serve a specific number of Medicare beneficiaries. Instead, the demonstration suppliers had to compete for beneficiaries' business. With few exceptions, only demonstration suppliers were reimbursed by Medicare for competitively bid items provided to beneficiaries permanently residing in the demonstration area. However, beneficiaries already receiving certain items were allowed to continue to use their existing nondemonstration suppliers. All demonstration suppliers were reimbursed for each competitively bid item provided to beneficiaries at the demonstration fee schedule amounts. The new fee schedules were based on the winning suppliers' bids for items included in the demonstration. Any Medicare supplier that served demonstration locations could provide items not included in the demonstration to beneficiaries. About 1 year after CMS's demonstration authority ended, MMA required the agency to conduct competitive bidding for DME, supplies, off-the-shelf orthotics, and enteral nutrients and related equipment and supplies. Competition is to be implemented in 10 of the largest MSAs in 2007, 80 of the largest MSAs in 2009, and additional areas thereafter. Items excluded from this authority are inhalation drugs; parenteral nutrients, equipment, and supplies; Class III devices; and customized orthotics that require expertise to fit individual beneficiaries. CMS may phase in implementation of competitive bidding first for the highest cost and highest volume items or those items with the greatest savings potential. The law requires that a Program Advisory and Oversight Committee be established to provide recommendations to CMS on its implementation of competitive bidding. MMA also gives CMS significant new authority to use competitive bidding results as a basis for determining reasonable payment rates throughout the country in 2009. CMS has the authority to apply the information obtained from competitive bidding to adjust payments in parts of the country outside of the competitive areas for DME, supplies, off-the-shelf orthotics, and enteral nutrients and related equipment and supplies. Thus, CMS will be able to more easily adjust its payment rates nationally to reflect market prices within the largest MSAs by using information gleaned through competitive bidding. While MMA sets specific requirements for competitive bidding, it also leaves certain implementation issues to CMS. As CMS implements competitive bidding, its payment- setting experience in the demonstration will prove useful as the agency considers items for competitive bidding and approaches to streamline implementation, collect information on specific items provided to beneficiaries, and ensure that beneficiaries' access to quality items and services is not compromised. Selecting items with high levels of Medicare spending may prove fruitful in generating significant savings in the first years of large-scale competitive bidding efforts. The demonstration provided CMS with experience in item selection, and MMA provides direction and guidance for future efforts. By including items that accounted for a large share of Medicare spending, the demonstration generated estimated gross savings that were substantially more than its implementation costs. In addition to the items included in the demonstration, others are worth considering for selection in future competitive bidding. For the competitive bidding demonstration, Palmetto and CMS chose items from six of the eight product groups that accounted for almost 78 percent of Medicare allowed charges in calendar year 2002, as table 2 shows. The demonstration also included items from two other product groups with lower levels of Medicare spending--urological supplies and surgical dressings. According to a CMS official, CMS did not include glucose monitors and supplies in competitive bidding because beneficiaries must frequently use brand-name supplies with their monitors. Ensuring that specific brands of glucose test strips were included would have complicated the first test of competitive bidding in the demonstration. However, the CMS official noted that CMS could consider including glucose supplies in future competitive bidding. Similarly, lower and upper limb prosthetics were not included because these items are generally custom made or fitted to beneficiaries and, for simplicity, the demonstration focused on noncustomized items. Our analysis of national Medicare spending for DME, prosthetics, orthotics, and supplies found that items included in the demonstration accounted for about half of all Medicare allowed charges in 2002. This was less than the total billing for all items in the product group because not all the individual items identified by HCPCS codes within product groups were included in the demonstration. For example, CMS excluded power wheelchairs from the competition. Estimated savings for competitively bid items in the demonstration would total about 20 percent of the fee schedule amounts, according to the demonstration evaluators. This equaled an estimated gross savings of $8.5 million in allowed charges, which include Medicare payments and beneficiary cost-sharing amounts. The estimated cost of the demonstration was about $4.8 million--about 40 percent lower than the estimated $8.5 million reduction in allowed charges associated with the demonstration. The demonstration's $4.8 million cost included $1.2 million for planning and development from September 1, 1995, through July 1, 1998, and $3.6 million for demonstration operating expenses through December 2002. For future efforts, MMA states that initial competitive bidding may include items with the highest Medicare cost and volume or items determined by the agency to have the largest savings potential. Working within these parameters for competitive bidding, CMS could select some items included in the demonstration as well as items with high Medicare spending that were not included in the demonstration. For example, nondemonstration items that CMS could choose include power wheelchairs and lancets and test strips used by diabetics. These three items accounted for about $1.7 billion, or about 17 percent, of Medicare allowed charges for DME, prosthetics, orthotics, and supplies in 2002. A CMS official and DME regional carrier medical directors told us that these items could be considered for inclusion in future competitive bidding. Two medical directors also suggested that continuous positive airway pressure devices and accessories, with $137 million in allowed charges-- or 1.4 percent of Medicare allowed charges for DME, prosthetics, orthotics, and supplies in 2002--could be considered for inclusion in future competitive bidding. CMS officials suggested that these devices and accessories could be included in early implementation of competitive bidding. Furthermore, if CMS is able to lower operating costs through efficiencies and streamlining, CMS could consider selecting additional products for competitive bidding with comparatively low levels of program spending for competitive bidding, such as commodes, canes, and crutches. While the demonstration laid the groundwork for future competition, given the expanded scale of future competitive bidding, CMS will have to focus on a second issue--ways to streamline implementation. The demonstration took place in just two MSAs and affected less than 1 percent of fee-for-service beneficiaries. In contrast, by 2009, MMA requires CMS to implement competitive bidding in 80 of the largest MSAs in the country. Our analysis showed that about half of Medicare's fee-for-service beneficiaries live in the 80 largest MSAs. In order to expand competitive bidding, CMS could potentially use two streamlining approaches-- developing standardized steps that are easily replicated in different locations and using mail-order delivery for selected items for which fees are determined through nationwide competitive bidding. In conducting the demonstration, CMS and Palmetto gained practical experience in planning how competitive bidding could be conducted, communicating with beneficiaries and suppliers, choosing demonstration items, developing software to process demonstration claims, establishing policies, and soliciting and evaluating supplier bids. In expanding the scope of competitive bidding, CMS will be able to leverage its experience to develop a standardized or "cookie-cutter" approach that can be applied in multiple locations. This would include a standard set of competitively bid items, procedures and policies, and informational materials for suppliers and beneficiaries. Through standardization, the costs of implementation in individual MSAs would likely be reduced relative to program savings. In the demonstration, adding a second location allowed CMS and Palmetto to spread much of the implementation costs across two locations, rather than one. The incremental costs of adding the San Antonio location, once the demonstration had been planned and begun in Polk County, were relatively low. For the San Antonio location, the estimated annual implementation costs ranged from $100,000 in a nonbidding year to $310,000 when bidding occurred, according to the second evaluation report. Another potential streamlining approach would be to provide items by mail-order delivery--a convenience for beneficiaries--with uniform fees determined through nationwide competitive bidding. Because MMA authorizes CMS to designate the geographic areas for competition for different items, designating the entire country as the competitive area for selected items is a possibility. In addition, MMA states that areas within MSAs that have low population density should not be excluded from competition if a significant national market exists through mail-order for a particular item or service. In contrast to conducting competitive bidding on a piecemeal basis in multiple geographic areas, a consolidated nationwide approach would allow CMS to more quickly implement competitive bidding on a large scale. This approach would enable companies that provide, or demonstrate the ability to provide, nationwide mail-order service to compete for Medicare beneficiaries' business. Items that lend themselves to mail delivery are light, easy to ship, and used by beneficiaries on an ongoing basis. Precedents exist for mail-order delivery of items that have been subject to competitive bidding. Demonstration suppliers provided surgical dressings, urological supplies, and inhalation drugs to beneficiaries by mail. In San Antonio, 30 percent of beneficiaries reported receiving their inhalation drugs through the mail, according to a demonstration evaluator, and Medicare paid an estimated 25 percent less than the fee schedule for Texas for these drugs. Glucose test strips and lancets are two items currently mailed to Medicare beneficiaries' homes that could be included in a future nationwide competition. In 2002, these items accounted for $831 million, or about 8.6 percent, of Medicare allowed charges for DME, prosthetics, orthotics, and supplies. Because glucose test strips generally must be used with the glucose monitors made by the same manufacturer, CMS would need to ensure that the most commonly used types of test strips were included. Finding ways to collect better information on the specific items provided to beneficiaries is the third issue for CMS to consider as it implements competitive bidding on a larger scale. Industry and advocacy groups have raised concerns that competitive bidding may encourage some suppliers to reduce their costs by substituting lower-quality or lower-priced items. However, CMS lacks the capability to identify specific items provided to beneficiaries because suppliers' claims use HCPCS codes, which can cover items that differ considerably in characteristics and price. Therefore, during the demonstration, CMS would not have been able to determine if suppliers tended to provide less costly items to beneficiaries. Furthermore, as CMS proceeds with competitive bidding, it will be difficult for the agency to appropriately monitor the type or price of specific items for which it is paying. A single HCPCS code can cover a broad range of items serving the same general purpose but with differing characteristics and prices. For example, in April 2004, the HHS OIG reported that prices available to consumers on supplier Web sites it surveyed for different models of power wheelchairs represented by a single HCPCS code ranged from $1,600 to almost $17,000. The 2003 Medicare fee schedule amount for all of the power wheelchairs under this code was a median of $5,297. Because Medicare pays the same amount for all of the items billed under the same HCPCS code, suppliers have an incentive to provide beneficiaries with the least costly item designated by that code. Since the Medicare program does not routinely collect specific information on items within a code for which it is paying, it is unable to determine if suppliers are providing lower-priced items or higher-priced items to beneficiaries. Using information from related work to determine the specific power wheelchairs provided to beneficiaries, the HHS OIG found that beneficiaries tend to receive lower- priced wheelchairs. The OIG recommended that CMS create a new coding system for the most commonly provided power wheelchairs to account for the variety in models and prices. CMS is currently working to develop a new set of codes to better describe the power wheelchairs currently on the market and plans to develop payment ceilings for each of the new codes. Under competitive bidding, suppliers might have even greater incentive to substitute less costly products listed under a code. For example, one of the demonstration suppliers explained that while a specific curved-tip catheter was superior for patients with scar tissue or obstructions, competitive bidding would encourage suppliers to substitute other, less-expensive catheters that can be paid under the same code. Thus, even if competitive bidding reduces fees paid, when suppliers substitute less costly items for more costly items, Medicare can pay too much for the actual items provided to beneficiaries. CMS officials pointed out that this is also true under the current fee schedule. CMS might better monitor the items being provided to beneficiaries if it subdivided certain HCPCS codes or collected identifying information. Subdividing HCPCS codes for items with significant variations in characteristics and price into smaller groupings is a way to narrow the differences among the items provided under a single code. The four DME regional carriers or the advisory committee established under MMA might be able to assist CMS in identifying those individual codes for items with the most significant variations in characteristics and price. Once these codes had been identified, CMS would be in a position to decide whether to request the panel that makes decisions on HCPCS codes for DME, orthotics, and supplies to consider whether to divide the codes into better- defined item groupings. Another way to get better information on the range of items provided under a code is to collect specific, identifying information (such as manufacturer, make, and model information) on selected, high-cost competitively bid items provided to beneficiaries. The DME regional carriers require suppliers to provide such information when it is requested for detailed reviews of claims for power wheelchairs. If CMS requested these data from suppliers for selected items provided under a HCPCS code for a statistically representative sample of claims, it would be able to analyze trends in the actual items provided to beneficiaries in competitive bidding areas or monitor the provision of items under the same code in competitive and noncompetitive areas. Because of concerns that competitive bidding may prompt suppliers to cut their costs by providing lower-quality items and curtailing services, a fourth issue for CMS to consider is ensuring that quality items and services are provided to beneficiaries. Quality assurance steps could include monitoring beneficiary satisfaction, as well as setting standards for suppliers, providing beneficiaries with a choice of suppliers, and selecting winning bidders based on quality in addition to amounts bid. During the demonstration, the agency and Palmetto gained practical experience in implementing quality assurance steps. This experience could prove instructive as CMS moves forward with competitive bidding efforts. As competitive bidding proceeds, routine monitoring of beneficiaries' complaints, concerns, and satisfaction can be used as a tool to help ensure that beneficiaries continue to have access to quality items. During the demonstration, the agency and Palmetto used full-time, on-site ombudsmen to respond to complaints, concerns, and questions from beneficiaries, suppliers, and others. In addition, to gauge beneficiary satisfaction, the evaluators of the demonstration fielded two beneficiary surveys by mail-- one for oxygen users and another for users of other products included in the demonstration. These surveys contained measures of beneficiaries' assessments of their overall satisfaction, access to equipment, and quality of training and service provided by suppliers. Evaluators reported that their survey data indicated that beneficiaries generally remained satisfied with both the products provided and with their suppliers. As competitive bidding expands and affects larger numbers of beneficiaries, small problems could be potentially magnified. Therefore, continued monitoring of beneficiary satisfaction will be critical to identifying problems with suppliers or with items provided to beneficiaries. When such problems are identified in a timely manner, CMS may develop steps to address them. In the past, when implementing significant Medicare changes, such as new payment methods for skilled nursing facilities and home health services, the agency has lacked timely and accurate information about how the changes affected beneficiary access. Nevertheless, it may not be practical in a larger competitive bidding effort to replicate the monitoring steps used in the demonstration. Developing less staff-intensive approaches to monitoring would reduce implementation costs. For example, a Palmetto official told us that while having an on-site ombudsman function may prove useful in the initial stages of competitive bidding, using a centralized ombudsman available through a toll-free number staffed by a contractor could provide some of the same benefits at a lower cost. In addition, certain monitoring enhancements could prove useful. For example, CMS did not use a formal mechanism for ombudsmen to summarize or report information on complaints from beneficiaries or suppliers, according to the demonstration ombudsmen. Collecting and analyzing complaint information may provide a credible gauge of problems related to beneficiary access to quality products. Continued use of satisfaction surveys could help track beneficiaries' satisfaction with items and services over time. However, advocacy group representatives have cautioned that beneficiaries may not have the technical knowledge to accurately assess the quality of the items or services being provided. Supplemental information might be obtained through standardized surveys of individuals who refer beneficiaries to suppliers, physicians, and supplier representatives, who may be better equipped to assess the technical quality of products and services. Two MMA requirements--the selection of multiple suppliers to serve beneficiaries and the establishment of supplier standards--help ensure that beneficiaries are satisfied with suppliers and the items they provide. The selection of multiple suppliers to serve beneficiaries was part of the competitive bidding process used during the demonstration. The establishment of supplier standards is broader than the competitive bidding program in that it applies to all suppliers, regardless of whether they choose to participate in competitive bidding. MMA requires that CMS select multiple suppliers that meet quality and financial standards to maintain choice in a competitive acquisition area. According to a CMS official, choosing to include multiple suppliers in the demonstration for each product group allowed beneficiaries to switch suppliers if dissatisfied with the quality of the services or items provided. CMS officials stated that selecting multiple suppliers encouraged suppliers to compete on the basis of quality and service to gain beneficiaries' business. After completing the bid evaluation process, CMS generally selected about 50 percent of the suppliers that bid in each group, with an average of 12 suppliers selected across the product groups. MMA also requires that CMS establish and implement quality standards for all suppliers of DME, prosthetics, orthotics, and supplies. These standards must be at least as stringent as the 21 general standards that all suppliers of DME, prosthetics, orthotics, and supplies are required to comply with in order to obtain and retain their Medicare billing privileges. (See app. II.) For the demonstration, suppliers were also required to meet standards developed by Palmetto that were more stringent and explicit than the current 21 general standards. For example, the demonstration standards required that only qualified staff deliver, set up, and pick up equipment and supplies and established time frames for suppliers to pick up equipment after a beneficiary had requested its removal. Palmetto monitored suppliers' adherence to the standards through initial and annual site visits. Applying quality measures as criteria to select winning suppliers is another demonstration assurance step that can be used in future efforts. During the demonstration bid evaluation process, Palmetto solicited references from financial institutions and from at least five individuals who had referred beneficiaries to each bidding supplier. In reviewing referrals, Palmetto looked for evidence of quality and service. This included evidence of financial stability and good credit standing, a record of providing products that met beneficiaries' needs, compliance with Medicare's rules and regulations, acceptable business practices, ethical behavior, and maintenance of accurate records. The bid evaluation process also included inspections of bidding suppliers' facilities that focused on indicators of quality and service. These on-site inspections were more comprehensive than those normally performed for Medicare suppliers of DME, prosthetics, orthotics, and supplies. For example, inspectors were tasked with determining if the supplier had access to the full range of products for which it had bid, documentation of infection control procedures, instructions on using equipment, and patient files with required information. In some cases, a demonstration supplier's selection was conditional on the supplier making specified improvements. For example, according to a CMS official, some suppliers were told to clarify instructions for beneficiaries, properly store oxygen equipment, or improve procedures for following up with patients after initial service was provided. CMS and Palmetto officials told us that comprehensive inspections were useful in ensuring the selection of quality suppliers. CMS can use its experience from the demonstration to make informed decisions as it implements large-scale competitive bidding within the framework established by MMA. The demonstration showed that competitive bidding has the potential to garner significant savings for both the Medicare program and its beneficiaries, especially on items with high levels of Medicare spending. While the potential exists for significant savings, moving from small-scale to large-scale competitive bidding calls for streamlining implementation. Developing a cookie-cutter approach to competitive bidding--for example, using the same policies and processes in multiple locations--could help CMS roll out its implementation in over 80 locations more easily, while employing mail-order to deliver items with prices set through nationwide competitive bidding could allow CMS to more quickly implement competitive bidding on a large scale. To ensure that competitive bidding savings are not achieved by the suppliers' substitution of lower-cost items, CMS can consider ways to collect better information on the specific items that suppliers are providing to beneficiaries. Finally, careful monitoring of beneficiaries' experiences will be essential to ensure that problems are quickly identified. This will allow CMS to adjust its implementation and quality assurance steps as it manages competition on a greater scale. To increase potential savings from competitive bidding, streamline implementation, help ensure that Medicare is paying appropriately for items, and promote beneficiary satisfaction, we recommend that the Administrator of CMS take the following seven actions: consider conducting competitive bidding for demonstration items and items that represent high Medicare spending that were not included in the competitive bidding demonstration; develop a standardized approach for competitive bidding for use at consider using mail delivery for items that can be provided directly to beneficiaries in the home, as a way to implement a national competitive bidding strategy; evaluate individual HCPCS codes to determine if codes need to be subdivided because the range in characteristics and price of items included under the individual codes is too broad; periodically obtain specific identifying information on selected high- cost items to monitor the characteristics of items subject to competitive bidding that are provided to beneficiaries, such as manufacturer, make, and model number; monitor beneficiary satisfaction with items and services provided; and seek input from individuals with technical knowledge about the items and services suppliers provide to beneficiaries. In its written comments on a draft of this report, CMS agreed with most of the recommendations and agreed to give serious consideration to the report throughout the development and implementation of national competitive bidding. CMS agreed to consider conducting competitive bidding for demonstration items and items that represent high Medicare spending that were not included in the demonstration. CMS indicated that the agency was working to develop a list of items for the first bidding cycle in 2007. CMS also agreed to develop a standardized approach for competitive bidding that could be used in multiple locations and indicated the agency's intention to outline such an approach through regulation. CMS stated it would explore the feasibility of our recommendation to consider using mail-order delivery for items that could be provided directly to beneficiaries in the home, as a way to implement a national competitive bidding strategy. Based on CMS's comments, we clarified the discussion in the report to indicate businesses that currently provide, or have the potential to provide, national mail-order delivery would be appropriate to include as bidders in nationwide competition. CMS also agreed with our recommendations to periodically obtain specific identifying information on selected high-cost items and to monitor beneficiary satisfaction with the items and services provided and indicated that it would be establishing a process to do so. CMS agreed with our recommendation to seek input from individuals with technical knowledge about the items and services suppliers provide to beneficiaries. The agency noted that pursuant to MMA, CMS would be convening a panel of experts, the Program Advisory and Oversight Committee, to assist with implementation of competitive bidding. CMS disagreed with one of our draft recommendations--to evaluate individual HCPCS codes to determine if they needed to be subdivided because the range in price of items included under the codes was too broad. The agency stated that subdividing codes according to price would lead to Medicare setting codes for particular brand names in circumstances where a manufacturer has established higher prices for products that do not have meaningful clinical differences or higher quality. In response to the agency's comment, we modified our discussion of HCPCS codes and revised our recommendation to state that CMS, in reevaluating individual HCPCS codes, should consider both the characteristics and prices of items. We have reprinted CMS's letter in appendix III. CMS also provided us with technical comments, which we have incorporated as appropriate. We are sending copies of this report to the Administrator of CMS, appropriate congressional committees, and other interested parties. We will also make copies available to others upon request. This report is also available at no charge on GAO's Web site at http://www.gao.gov. If you or your staff have any questions about this report, please call me at (312) 220-7600 or Sheila K. Avruch at (202) 512-7277. Other key contributors to this report are Sandra D. Gove, Lisa S. Rogers, and Kevin Milne. To assess issues that the Centers for Medicare & Medicaid Services (CMS) might consider as it implements the Medicare Prescription Drug, Improvement, and Modernization Act of 2003 (MMA) provisions concerning competitive bidding, we reviewed the relevant provisions of MMA. We also reviewed the first and second evaluation reports on the Medicare competitive bidding demonstration and discussed methodology and findings with the evaluators. We interviewed officials from CMS and Palmetto Government Benefits Administrators (Palmetto) about experience gained during the demonstration. For the product selection issue, we analyzed calendar year 2002 Medicare durable medical equipment (DME), prosthetics, orthotics, and supply claims data obtained from the statistical analysis durable medical equipment regional carrier (SADMERC). Through this analysis, we identified the product groups and items that represented the largest Medicare allowed charges and the allowed charges for items included in the demonstration. We also used these data to identify items that accounted for higher Medicare spending but were excluded from the demonstration. We determined that the data obtained from the SADMERC were sufficiently reliable for addressing the issues in this report. These data were extracted from a CMS file that includes all Medicare claims payment data. CMS has a number of computerized edits to help ensure that Medicare payment data are accurately recorded, and the SADMERC has internal controls to ensure that data extracted from the CMS file are timely and complete. Where appropriate, we tested data manually against published sources for consistency. To identify items that could be included in future competitive bidding, we interviewed CMS and Palmetto officials and the medical directors at the four DME regional carriers. For the issue of streamlining implementation, we obtained information on the cost of the demonstration from the second evaluation report. To estimate the number of fee-for-service beneficiaries who will be affected by future competitive bidding, we adjusted the Census 2000 population estimates for individuals age 65 and over to account for the number of beneficiaries enrolled in Medicare's managed care program by using data obtained from the Medicare Managed Care Market Penetration State/County Data Files. We assessed the reliability of the Census 2000 data by reviewing relevant documentation and working with an official from the U.S. Census Bureau. We assessed the reliability of the Medicare Managed Care Market Penetration State/County Data Files by reviewing relevant documentation. We determined these data sources to be sufficiently reliable for the purposes of our report. We also obtained information from CMS on the demonstration items that beneficiaries obtained by mail and conducted research to identify items delivered directly to customers' homes by private sector organizations. We also solicited input from the medical directors at the four DME regional carriers concerning items that could be delivered by mail-order and included in a nationwide competition. For the issue concerning information on specific items provided to beneficiaries, we reviewed prior GAO reports and testimonies. In addition, we interviewed the following representatives of industry and advocacy groups: Abbott Laboratories; the Advanced Medical Technology Association; the American Association for Homecare; the American Occupational Therapy Association; the American Orthotic and Prosthetic Association; the Consortium for Citizens with Disabilities; the Diabetic Product Suppliers Coalition; LifeScan, Inc.; Johnson & Johnson Company; Kinetic Concepts, Inc.; Tyco Healthcare Group; the National Alliance for Infusion Therapy; Roche Diagnostics; and the United Ostomy Association. For the issue relating to ensuring quality items and services for beneficiaries, we discussed quality assurance steps and approaches for monitoring beneficiary satisfaction used during the demonstration with CMS and Palmetto officials and the demonstration's evaluators. We also interviewed the two demonstration ombudsmen to discuss beneficiaries' concerns and experiences in obtaining items during the demonstration. We discussed issues related to competitive bidding and beneficiaries' access to quality products and services with suppliers of DME, including three suppliers that participated in the demonstration; the industry and advocacy groups listed above; and the DME regional carrier medical directors. In addition, we compared quality standards for demonstration suppliers with the 21 supplier standards that apply to all Medicare suppliers of DME, prosthetics, orthotics, and supplies. Suppliers of DME, prosthetics, orthotics, and supplies must meet 21 standards in order to obtain and retain their Medicare billing privileges. An abbreviated version of these standards, which became effective December 11, 2000, is presented in table 3. MMA requires CMS to develop new standards that must be at least as stringent as current standards for all Medicare suppliers of DME, prosthetics, orthotics, and supplies. 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The Medicare Prescription Drug, Improvement, and Modernization Act of 2003 (MMA) requires the Centers for Medicare & Medicaid Services (CMS) to conduct large-scale competitive bidding for durable medical equipment, supplies, off-the-shelf orthotics, and enteral nutrients and related equipment and supplies provided to beneficiaries. The Balanced Budget Act of 1997 mandated that GAO study an earlier Medicare competitive bidding demonstration. To address this mandate, GAO assessed this past experience in relation to four issues that CMS might consider as it implements large-scale competitive bidding: (1) items for competitive bidding, (2) how to streamline implementation, (3) ways to collect information on specific items provided to beneficiaries, and (4) steps to ensure quality items and services. CMS's experience in the Medicare competitive bidding demonstration may prove instructive as the agency implements provisions in MMA to conduct large-scale competitive bidding for durable medical equipment, supplies, off-the-shelf orthotics, and enteral nutrients and related equipment and supplies. The experience gained during the demonstration provides insight as the agency considers four implementation issues. Items for competitive bidding: Items for competitive bidding could include those selected for the demonstration and others that account for high levels of Medicare spending. For example, nondemonstration items that CMS could choose for competitive bidding include power wheelchairs and lancets and test strips used by diabetics. In 2002, these three items accounted for about $1.7 billion in charges for the Medicare program and its beneficiaries. How to streamline implementation: Because of the large scale of future competitive bidding, it will be prudent for CMS to consider ways to streamline implementation. Two ways to streamline are developing a standardized competitive bidding approach that can be replicated in multiple geographic locations and using mail-order delivery for selected items, with uniform fees established through a nationwide competition. Ways to collect information on specific items provided to beneficiaries: Gathering specific information on competitively bid items provided to beneficiaries could help ensure that suppliers do not substitute lower-priced items to reduce their costs. Currently, CMS is not able, or does not routinely, collect specific information on the items that suppliers provide to beneficiaries. Steps to ensure quality items and services for beneficiaries: Routine monitoring could help ensure that beneficiaries continue to have access to suppliers that deliver quality items and services. The agency, when implementing significant Medicare changes in the past that affected payment methods, has lacked information on how the changes affected beneficiary access. As competitive bidding expands, small problems could be potentially magnified. Using quality measures to choose multiple suppliers and having suppliers meet more detailed standards than are currently required can also help ensure quality for beneficiaries.

Mr. Chairman and Members of the Subcommittee: We are pleased to be here today to discuss our report on the efforts of the Postal Service, the four major labor unions, and the three management associations to improve employee working conditions and overall labor-management relations. Our recently issued report provides updated information related to our September 1994 report, which identified various labor-management relations problems in the Postal Service and made recommendations for addressing such problems. In our most recent report, we discussed the challenges that these eight organizations continue to face in attempting to improve labor-management relations. Specifically, this report provides information on three topics: (1) the extent to which the Service, the four unions, and the three management associations have progressed in addressing persistent labor-management relations problems since our 1994 report was issued; (2) the implementation of various improvement efforts, referred to in the report as initiatives, some of which were intended to help these eight organizations deal with the problems that we identified in our 1994 report; and (3) approaches that might help the eight organizations improve labor-management relations. which the Service was using a third party to serve as a facilitator in labor-management discussions, which we recommended in our 1994 report. Since our 1994 report was issued, the Postal Service has improved its overall financial performance, as well as its delivery of First-Class Mail. However, little progress has been made in improving persistent labor-management relations problems. In many instances, such problems were caused by autocratic management styles, the sometimes adversarial relationships between postal management and union leadership at the local and national levels, and an inappropriate and inadequate performance management system. Labor-management problems make it more difficult for these organizations to work together to improve the Service's performance so it can remain competitive in today's dynamic and competitive communications market. In recent years, we have found that the sometimes adversarial relationships between postal management and union leadership at national and local levels have generally persisted, as characterized by (1)a continued reliance on arbitration by three of the four major unions to settle their contract negotiation impasses with the Service, also known as interest arbitration; (2)a significant rise not only in the number of grievances that have been appealed to higher levels but also in the number of those awaiting arbitration; and (3)until recently, the inability of the Service and the other seven organizations to convene a labor-management relations summit to discuss problems and explore solutions. According to various postal, union, and management association officials whom we interviewed, the problems persist primarily because the parties involved cannot agree on common approaches for addressing these problems. This, in turn, has prevented the Service and the other seven organizations from sustaining the intended benefits of specific improvement efforts that could help improve the postal workroom climate. I would now like to discuss these problems in more detail. Regarding the use of interest arbitration, as discussed in our 1994 report, contract negotiations occur nationally between the Service and the four labor unions every 3 or 4 years. Since as far back as 1978, interest arbitration has sometimes been used to resolve bargaining deadlocks in contract negotiations by APWU, NALC, and Mail Handlers. The most recent negotiations occurred for contracts expiring in November 1994 for those three unions. The issues at stake were similar to those raised in previous negotiations, which included the unions' concerns about wage and benefit increases and job security and postal management's concerns about cost cutting and flexibility in hiring practices. According to a postal official, negotiations about old issues that keep resurfacing have at times been bitter and damaging to the relationship between the Service and the unions at the national level. Union officials also cited the Service's contracting out of various postal functions--also known as outsourcing--as a topic that has caused them a great deal of concern. high volume. These officials told us that their views had not changed significantly since we issued our 1994 report. Generally, the officials tended to blame each other for the high volume of grievances being filed and the large number of backlogged grievances. Finally, at the time our 1997 report was issued, the Postal Service and the other seven organizations had been unable to convene a labor-management relations summit. The Postmaster General (PMG) proposed the summit over 2 years ago to, among other things, address our recommendation to establish a framework agreement of common goals and approaches that could help postal, union, and management association officials improve labor-management relations and employee working conditions. Initially, the responses from the other seven organizations to the PMG's invitation were mixed. For instance, around January 1995, the leaders of the three management associations and the Rural Carriers union accepted the invitation to participate in the summit. However, at that time, the contracts for three unions--APWU, NALC, and Mail Handlers--had expired and negotiations had begun. The union leaders said they were waiting until contract negotiations were completed before making a decision on the summit. In April 1996, when negotiations had been completed, the three unions agreed to participate. Because of these initial difficulties in convening the summit, in February 1996, the Service asked the Director of FMCS to provide mediation services to help convene the summit. Also, in March 1996, Mr. Chairman, you encouraged the FMCS Director to assist the Service by providing such services. As discussed in our 1997 report, although various preliminary meetings had taken place to determine an agenda, the efforts to convene a summit were not successful. Recently, according to an FMCS official, a summit occurred on October 29, 1997, that was attended by various officials from the eight organizations, including the Postal Service, the four major unions, and the three management associations. We are encouraged by the fact that this meeting occurred. Such meetings can provide the participants a means of working toward reaching agreement on common approaches for addressing labor-management relations problems. We believe that such agreement is a key factor in helping these organizations sustain improvements in their relations and in the postal work environment. September 1996) on Delivery Redesign, have not endorsed the testing of the revised processes. At the national level, NALC officials told us that they believed that revisions to the processes by which city carriers sort and deliver mail should be established through the collective bargaining process. The Employee Opinion Survey (EOS) is an example of an initiative that was discontinued. The nationwide annual EOS, begun in 1992 and continued through 1995, was a voluntary survey designed to gather the opinions of all postal employees about the Service's strengths and shortcomings as an employer. Postal officials told us that such opinions have been useful in helping the Service determine the extent of labor-management problems throughout the organization and make efforts to address those problems. Efforts to continue implementing this initiative were hampered primarily by disagreements among the Service and the other involved participants over how best to use the initiative to help improve the postal work environment. Also, according to postal officials, a lack of union participation in this initiative generally caused the Service to discontinue its use. According to some postal and union officials, the 1995 EOS was boycotted primarily because some unions believed that the Service inappropriately used the results of past surveys during the 1994 contract negotiations. As discussed in our report, we continue to believe that to sustain and achieve maximum benefits from any improvement efforts, it is important for the Service, the four major unions, and the three management associations to agree on common approaches for addressing labor-management relations problems. Our work has shown that there are no clear or easy solutions to these problems. But continued adversarial relations could lead to escalating workplace difficulties and hamper efforts to achieve desired improvements. In our report, we identified some approaches that might help the Service, the unions, and the management associations reach consensus on strategies for dealing with persistent labor-management relations problems. Such approaches included the use of a third-party facilitator, the requirements of the Government Performance and Results Act, and the proposed Postal Employee-Management Commission. As I mentioned previously, with the assistance of FMCS, the Postal Service, the four major unions, and the three management associations recently convened a postal summit meeting. As discussed in our 1994 report, we believe that the use of FMCS as a third-party facilitator indicated that outside advice and assistance can be useful in helping the eight organizations move forward in their attempts to reach agreement on common approaches for addressing labor-management relations problems. In addition, the Government Performance and Results Act provides an opportunity for joint discussions. Under the Results Act, Congress, the Postal Service, its unions, and its management associations as well as other stakeholders with an interest in postal activities can discuss not only the mission and proposed goals for the Postal Service but also the strategies to be used to achieve desired results. These discussions can provide Congress and the other stakeholders a chance to better understand the Service's mission and goals. Such discussions can also provide opportunities for the parties to work together to reach consensus on strategies for attaining such goals, especially those that relate to the long-standing labor-management relations problems that continue to challenge the Service. Another approach aimed at improving labor-management relations is the proposed establishment of an employee-management commission that was included in the postal reform legislation you introduced in June 1996 and reintroduced in January 1997. Under this proposed legislation, a temporary, presidentially appointed seven-member Postal Employee-Management Commission would be established. This Commission would be responsible for evaluating and recommending solutions to the workplace difficulties confronting the Service. The proposed Commission would prepare its first set of reports within 18 months and terminate after preparing its second and third sets of reports. We received comments on a draft of our report from nine organizations--the Service, the four major unions, the three management associations, and FMCS. The nine organizations generally agreed with the report's basic message that little progress had been made in improving persistent labor-management relations problems, although they expressed different opinions as to why. Also, the nine organizations often had different views on such matters as the implementation of and results associated with the 10 initiatives; the likelihood of the organizations to reach consensus on the resolution of persistent labor-management relations problems; the desirability of having external parties, such as Congress, become involved in addressing such problems; and the comprehensiveness of our methodology, which we believed was reasonable and appropriate given the time and resources available. We believe that the diversity of opinions on these matters reinforces the overall message of our most recent report and provides additional insight on the challenges that lie ahead with efforts to try to improve labor-management relations problems in the Postal Service. In summary, the continued inability to reach agreement has prevented the Service, the four major unions, and the three management associations from implementing our recommendation to develop a framework agreement. We continue to believe that such an agreement is needed to help the Service, the unions, and the management associations reach consensus on the appropriate goals and approaches for dealing with persistent labor-management relations problems and improving the postal work environment. Although we recognize that achieving consensus may not be easy, we believe that without it, workplace difficulties could escalate and hamper efforts to bring about desired improvements. Mr. Chairman, this concludes my prepared statement. My colleague and I would be pleased to respond to any questions you may have. The first copy of each GAO report and testimony is free. Additional copies are $2 each. Orders should be sent to the following address, accompanied by a check or money order made out to the Superintendent of Documents, when necessary. VISA and MasterCard credit cards are accepted, also. Orders for 100 or more copies to be mailed to a single address are discounted 25 percent. U.S. General Accounting Office P.O. Box 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. 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GAO discussed its report on the efforts of the Postal Service, the four major labor unions, and the three management associations to improve employee working conditions and overall labor-management relations, focusing on: (1) the extent to which the Postal Service, the four unions, and the three management associations have progressed in addressing persistent labor-management relations problems since GAO's 1994 report was issued; (2) the implementation of various improvement efforts, or initiatives, some of which were intended to help these eight organizations deal with problems identified in the 1994 report; and (3) approaches that might help the eight organizations improve labor-management relations. GAO noted that: (1) little progress has been made in improving persistent labor-management relations problems at the Postal Service since 1994; (2) although the Postal Service, the four major unions, and the three management associations generally agreed that improvements were needed, they have been unable to agree on common approaches to solving such problems; (3) these parties have not been able to implement GAO's recommendation to establish a framework agreement that would outline common goals and strategies to set the stage for improving the postal work environment; (4) in a recent report, GAO described some improvement initiatives that many postal, union, and management association officials believed held promise for making a difference in the labor-management relations climate; (5) despite actions taken to implement such initiatives, little information was available to measure results, as some initiatives: (a) had only recently been piloted or implemented; or (b) were not fully implemented or had been discontinued because postal, union, and management association officials disagreed on the approaches used to implement the initiatives or on their usefulness in making improvements; (6) efforts to resolve persistent labor-management relations problems pose an enormous challenge for the Postal Service and its unions and management associations; (7) with assistance from a third-party facilitator, the Postal Service and leaders from the four unions and the three management associations convened a summit, aimed at providing an opportunity for all the parties to work toward reaching agreement on how best to address persistent labor-management relations problems; (8) another such opportunity involves the strategic plan required by the Government Performance and Results Act, which can provide a foundation for all major postal stakeholders to participate in defining common goals and identifying strategies to be used to achieve these goals; (9) a proposal was included in pending postal reform legislation to establish a presidentially appointed commission that could recommend improvements; (10) GAO continues to believe that it is important for the eight organizations to agree on appropriate strategies for addressing labor-management relations problems; (11) various approaches exist that can be used to help the organizations attain consensus; and (12) without such consensus, the ability to sustain lasting improvements in the postal work environment may be difficult to achieve.

DOD is historically the federal government's largest purchaser of services. Between 2001 and 2002, DOD's reported spending for services contracting increased almost 18 percent, to about $93 billion. In addition to the sizeable sum of dollars involved, DOD contracts for a wide and complex range of services, such as professional, administrative, and management support; construction, repair, and maintenance; information technology; research and development; medical care; operation of government-owned facilities; and transportation, travel, and relocation. In each of the past 5 years, DOD has spent more on services than on supply and equipment goods (which includes weapon systems and other military items) (see fig. 1). Despite this huge investment in buying services, our work--and the work of the DOD Inspector General--has found that DOD's spending on services could be more efficient and more effectively managed. In fact, we have identified DOD's overall contract management as a high-risk area, most recently in our Performance and Accountability and High-Risk Series issued this past January. Responsibility for acquiring services is spread among individual military commands, weapon system program offices, or functional units in various defense organizations, with limited visibility or control at the DOD- or military-department level. Our reports on DOD's contract management have recommended that DOD use a strategic approach to improve acquisition of services. Our work since 2000 at leading companies found that taking a more strategic approach to acquiring services enabled each company to stay competitive, reduce costs, and in many cases improve service levels. Pursuing such a strategic approach clearly pays off. Studies have reported some companies achieving savings of 10 to 20 percent of their total procurement costs, which include savings in the procurement of services. These leading companies reported achieving or expecting to achieve billions of dollars in savings as a result of taking a strategic approach to procurement. For example, table 1 summarizes the savings reported by the companies we studied most recently. The companies we studied did not follow exactly the same approach in the manner and degree to which they employed specific best practices, but the bottom line results were the same--substantial savings and, in many cases, service improvements. Figure 2 elaborates on the four broad principles and practices of leading companies that are critical to successfully carrying out the strategic approach. These principles and practices largely reflect a common sense approach, yet they also represent significant changes in the management approach companies use to acquire services. Companies that have been successful in transforming procurement generally begin with a corporate decision to pursue a more strategic approach to acquiring services, with senior management providing the direction, vision, and clout necessary to obtain initial buy-in and acceptance of procurement reengineering. When adopting a strategic, best-practices approach for changing procurement business processes, companies begin with a spend analysis to examine purchasing patterns to see who is buying what from whom. By arming themselves with this knowledge, they identify opportunities to leverage their buying power, reduce costs, and better manage their suppliers. Companies also institute a series of structural, process, and role changes aimed at moving away from a fragmented acquisition process to a more efficient and effective corporate process. These changes include adjustments to procurement management structure and processes such as instituting companywide purchasing of specific services; reshaping a decentralized process to follow a more coordinated, strategic approach; and increasing the involvement of the corporate procurement organization, including working across units to help identify service needs, select providers, and better manage contractor performance. DOD has made limited progress in its overall implementation of section 801, particularly with respect to establishing a management structure to oversee a more strategic approach to the acquisition of services, as envisioned by the legislative history of this provision. While DOD's leaders express support for a strategic approach in this area, they have not translated that support into broad-based reforms. The experience of leading companies offers particularly relevant insights into the nature of long-term changes in management structure and business processes. Long-term changes will be needed if the military departments and the defense agencies are to be successful in adopting a more strategic approach to acquiring services and achieving substantial savings and other benefits. Private sector experience demonstrates the need to change how services are acquired--by modernizing management structure and business processes--and setting performance goals, including savings, and establishing accountability for achieving them. Such changes are needed to move DOD and the military departments from a fragmented approach to doing business to one that is more coordinated and strategically oriented. The end goal is to institute a departmentwide perspective--one that will ensure that the organization is getting the best overall value. Industry has found that several ingredients are critical to the successful adoption of a strategic approach. For example, senior management must provide continued support for common services acquisitions processes beyond the initial impetus. Another example is to cut across traditional organizational boundaries that contributed to the fragmented approach by restructuring procurement management and assigning a central or corporate procurement organization greater responsibility and authority for strategic planning and oversight of the companies' service spending. Companies also involve business units in this coordinated approach by designating commodity managers to oversee key services and making extensive use of cross-functional commodity teams to make sure they have the right mix of knowledge, technical expertise, and credibility. Finally, companies extensively use metrics to measure total savings and other financial and nonfinancial benefits, to set realistic goals for improvement, and to document results over time. To date, DOD has not significantly transformed its management structure in response to the 2002 national defense authorization requirements, and its crosscutting effort to improve oversight will focus on only a portion of military department spending for services. Specifically, the Under Secretary of Defense for Acquisition, Technology, and Logistics and each of the military departments now have policies in place for a management structure and a process for reviewing major (i.e., large-dollar or program- critical) services acquisitions for adherence to performance-based, competition and other contracting requirements. (See app. I for a descriptive comparison of DOD and military department policies.) DOD modeled its review process for acquiring services after the review process for acquiring major weapons systems; the policy is intended to elevate high-dollar value services to the same level of importance and oversight. DOD intends that the new program review structure provide oversight before it commits the government to a major acquisition to ensure that military departments and defense agencies' buying strategies are adequately planned, performance-based, and competed. The new policy similarly establishes a high-dollar threshold of $500 million or more for selecting which service acquisitions must move forward from lower-level field activities, commands, and program offices to the military department headquarters (and possibly to DOD) for advance review and approval. We expect that this new policy will lead to very few service acquisition strategies and a small portion of overall service spending being subjected to central oversight at the military department headquarters level or at DOD headquarters. DOD officials acknowledge that most service acquisitions cost less than the $500 million threshold required for headquarters-level reviews, and the total value of the few contract actions likely to be forwarded under that threshold will amount to a small portion of DOD's total spending on services, which is approaching $100 billion each year. DOD's review criteria indicate that the central reviews that do take place will be focused on approving individual acquisitions rather than coordinating smaller, more fragmented requirements for service contracts to leverage buying power and assessing how spending could be more effective. Our discussions with procurement policy officials in the various military departments confirmed that they expect no more than a few acquisitions to be reviewed at the DOD or military department headquarters level each year. While the new process complies with the act's requirements to improve oversight of major service acquisitions, it has not led to centralized responsibility, visibility, or accountability over the majority of contracting for services. In response to the legislative requirement to develop an automated system to collect and analyze data, DOD has started a spend analysis pilot that views spending from a DOD-wide perspective and identifies large-scale savings opportunities. However, the scope of the pilot is limited to a test of a few service categories. Thirteen months after Congress directed that DOD create an automated system to support management decisions for the acquisition of services, the Deputy Secretary of Defense tasked a new team to carry out the pilot. In May 2003, DOD hired a vendor to support the team by performing an initial spend analysis and developing strategic sourcing business cases for only 5 to 10 service categories. Efforts to extract data for the pilot spend analysis will be restricted to information taken from centrally available databases on services contract actions (excluding research and development) in excess of $25,000, a limitation due to the 90-day time frame established for completing the spend analysis. Pilot projects and associated efforts will be completed by September 2004, so it is too early to tell how DOD will make the best use of the results. Even though DOD's senior leadership called for dramatic changes to current practices for acquiring services about 2 years ago, and proposed various initiatives and plans to transform business processes, DOD's early initiatives have not moved forward quickly, expanded or broadened in scope, or been well coordinated. The experience of leading companies we studied in our prior work indicates that successfully addressing service acquisition challenges requires concerted action and sustained top-level attention, efforts that must be reinforced by a sound strategic plan. Moreover, section 801 required DOD to issue guidance on how the military departments should carry out their management responsibilities for services contracting. To date, the only guidance that DOD has issued involves review of individual major service acquisitions for adherence to performance-based, competition, and other acquisition strategy requirements. DOD has not established a strategic plan that provides a road map for transforming its services contracting process and recognizes the integrated nature of services contracting management problems and their related solutions. Air Force, Army, and Navy headquarters procurement organizations have initiatives underway to better manage the acquisition of services, but they are in the early stages of development and unconnected to each other. Limited progress has taken place on key efforts to coordinate responsibility and leverage purchasing power, even in the pursuit of key goals such as reducing unnecessary spending and redirecting funds to higher priorities such as modernization and readiness. Information we obtained on the military departments' early efforts suggests that military department leaders understand the value of a strategic approach in this area, but they have not yet translated that understanding into broad-based reforms to meet comprehensive performance goals, including savings. Although the Air Force, Army, and Navy initiatives that follow seek to include the basic principles of the framework used by leading companies when they acquire services, the initiatives are still under study, or in the early stages of implementation. At a January 2003 symposium, Air Force participants from headquarters and major commands discussed a vision for transforming contracting for services and taking a strategic, departmentwide approach based on commercial best practices. At this event, the Deputy Assistant Secretary for Contracting called for rethinking business processes, noting that the Air Force spends over half of its discretionary dollars on services, yet most of the attention goes to managing goods. To move forward on this initiative, staff from acquisition headquarters and major commands are to work together on an 18-month project to capture, analyze, and use spend analysis data and develop an Air Force strategic sourcing plan for services acquisitions. Another key initiative participants considered was the establishment by the Air Force of a management council for services contracting. No time frame has been set for when the Air Force would activate such a council. However, the deputy assistant secretary's vision for adopting a best practices approach to contracting for services calls for radically transforming business processes within 5 years and establishing cross-functional, Air Force-wide councils to consolidate market knowledge and carry out strategic sourcing projects. In July 2003, in the first such effort to take advantage of its overall buying power, the Air Force formed a commodity council responsible for developing departmentwide strategies for buying and managing information technology products. According to an Air Force official involved with this council, the lessons learned and best practices of this council will be carried forward to other commodity councils that will be established by the Air Force. Another category that the Air Force is considering for a future commodity council is construction services. In 2001, top Army leadership approved a consolidation of Army contracting activities that focuses on the areas of installation management and general-purpose information technology. This initiative covers only a portion of the Army's service spending, and it involved the establishment of the Army Contracting Agency in October 2002 to centralize much installation-support contracting under a corporate management structure and called for consolidating similar and common use requirements to reduce costs. This central agency will be fully responsible for Army-wide purchases of general information technology and electronic commerce purchases and for large installation management contracting actions over $500,000 that were previously decentralized. The agency's key anticipated benefit will be its ability to centralize large buys that are common Army-wide, while continuing to provide opportunities for small businesses to win contracts. To have an early demonstration of the value of this approach, the agency plans an October 2003 spend analysis of several services that could offer easy savings, including security guards, furniture refinishing, telecommunications, building demolition, and photocopying. The agency has yet to set a time frame for carrying out the consolidated purchases, which could be national or regional in scope. The agency's organizational structure assigns regional executive responsibility for managing services contracting, and includes a high-level council in headquarters for overseeing more strategic approaches to buying Army installation support services. The Navy is considering pilot tests of a more strategic approach for services spending in a few categories. Senior Navy leadership began a study in September 2002 to recommend business process changes in the Navy's acquisition program. A Navy official conducting the preliminary spend analysis of Navy purchasing data estimated opportunities to save $115 million through taking a more strategic, coordinated approach to buying $1.5 billion in support services (engineering; logistics; program, general, and facilities management; and training). The Navy official said that, sometime this year, senior Navy leadership is expected to approve the study's recommendations to pilot-test consolidated acquisition for support services. To lead these innovative management approaches, the Secretary of the Navy earlier this year approved a new position for a Director of Program Analysis and Business Transformation within the Office of the Deputy Assistant Secretary for Acquisition Management. A Navy procurement policy official involved with the ongoing effort told us that the Navy's pilot tests are likely to be affected by DOD's spend analysis pilot that is testing DOD-wide strategic sourcing strategies for 5 to 10 services. Since Navy procurement policy officials are also involved in DOD's pilot, he anticipates having to coordinate the Navy's pilot as both initiatives move forward. A strategic plan could help DOD ensure that these early initiatives successfully lead to lower costs and improved acquisition of services. Such a plan would identify, coordinate, and prioritize these initiatives; integrate the military departments' services contracting management structures; ensure comprehensive coverage of services spending; promote and support collaboration; and establish accountability, transparency, and visibility for tracking performance and achieving results. However, some of the procurement policy officials we interviewed have expressed skepticism that broad-based reforms to foster a more strategic approach are necessary or beneficial, or that DOD could fully adopt private sector strategies in view of its current decentralized acquisition environment and other constraints. Given the federal government's critical budget challenges, DOD's transformation of its business processes is more important than ever if the department is to get the most from every dollar spent. Senior leadership has for 2 years expressed a commitment to improving the department's acquisition of services. Nonetheless, DOD and the military departments remain in the early stages of developing new business processes for the strategic acquisition of services. DOD's leaders have made a commitment to adopt best practices and make dramatic changes. Translating that commitment into specific management improvements will allow DOD to take on the more difficult tasks of developing a reliable and accurate picture of spending on services across DOD; determining what structures, mechanisms, and metrics can be employed to foster a strategic approach; and tailoring those structures to meet DOD's unique requirements. Given that DOD's spending on services contracts is approaching $100 billion annually, the potential benefits for enhancing visibility and control of services spending are significant. To achieve significant improvements across the range of services DOD purchases, we recommend that the Secretary of Defense direct the Under Secretary of Defense for Acquisition, Technology, and Logistics to work with the military departments and the defense agencies to further strengthen the management structure. This structure, established in response to section 801, should promote the use of best commercial practices such as centralizing key functions, conducting spend analyses, expanding the use of cross-functional commodity teams, achieving strategic orientation, achieving savings by reducing purchasing costs and other efficiencies, and improving service contracts' performance and outcomes. We also recommend that the Secretary of Defense direct the Under Secretary to develop a strategic plan with guidance for the military departments and the defense agencies on how to carry out their responsibilities for managing acquisition of services. Key elements of this guidance should address improving knowledge of services spending by collecting and analyzing data about services procurements across DOD and within military departments and defense agencies, promoting collaboration across DOD and within military departments and defense agencies by establishing cross-functional teams to carry out coordinated purchasing of services, and establishing strategic savings and performance goals, measuring results, and ensuring accountability by assigning high-level responsibility for monitoring those results. In commenting on a draft of this report, DOD concurred in principle with the recommendation to further strengthen the management structure established in response to section 801 and partially concurred with the recommendation to develop a plan with guidance to the military departments on carrying out their strategic and centralized responsibilities for the acquisition of services. DOD expects that various initiatives being pursued to enhance services acquisition management structures and processes--such as the management structure for reviewing individual service acquisitions valued at more than $500 million and the spend analysis pilot assessed in this report--will ultimately provide the information with which to decide what overarching joint management and business process changes are necessary. DOD cites these initiatives as demonstrating a full commitment to improving acquisition of services. DOD further states that these efforts--such as collecting and enhancing data, performing spend analyses, and establishing commodity teams--are similar to industry best practices--and have already had significant impacts on the manner in which services are acquired. We agree that the initiatives are positive steps in the right direction to improve acquisition of services. However, it is too early to tell if these early efforts will lead DOD and the military departments to make the type of long-term changes that are necessary to achieve significant results in terms of savings and service improvements. Moreover, according to DOD, factors such as unusual size, organizational complexity, and restrictive acquisition environment mean that DOD cannot adhere strictly to the commercial best practices described in the report. Yet, none of the companies we studied followed exactly the same approach in employing specific best practices. Likewise, DOD and the military departments need to work together and determine how these practices can be adapted to fit their unique needs, challenges, and complexities. Significant bottom line results in terms of savings and service improvements are likely with adequate follow-through on the various initiatives. DOD's strategic plan should be explicit about how and when appropriate follow-through actions will take place so that significant, long-lasting performance improvements and cost savings are achieved. DOD's comments can be found in appendix II. Section 801 of the National Defense Authorization Act for Fiscal Year 2002 requires DOD to establish a management structure and a program review structure and to collect and analyze data on purchases in order to improve management of the acquisition of services. As described in the legislative history, these requirements provide tools with which the department can promote the use of best commercial practices to reform DOD's services procurement management and oversight and to achieve significant savings. Section 801 also directed us to assess DOD's compliance with the requirements and to report to congressional armed services committees on the assessment. To conduct this work, we interviewed officials--including those responsible for Defense Procurement and Acquisition Policy, and Acquisition Resources and Analysis--in the Office of the Secretary of Defense and the Office of the Under Secretary of Defense for Acquisition, Technology, and Logistics. We also interviewed officials responsible for service acquisition policy and management in the Air Force, the Army, and the Navy. We interviewed both DOD's and the various services' officials about policy memoranda and related actions taken to implement section 801 requirements, including the evolving nature of implementation actions over several months. We also discussed comparisons between DOD's and the military departments' services acquisition management reforms and leading companies' best practices for taking a strategic approach, which were identified in our previous work and promoted by the legislation. To assess compliance with the policy and guidance requirements for the management and program review structures, we reviewed internal memoranda and policy documents issued by the Under Secretary of Defense and the military departments. For background on DOD's contract spending on services, we analyzed computer-generated data extracted from the Defense Contract Action Data System. We did not independently verify the information contained in the database. There are known data reliability problems with this data source, but we determined that the data are sufficient to provide general trend information for background reporting purposes. We conducted our review from November 2002 to July 2003 in accordance with generally accepted government auditing standards. We are sending copies of this report to other interested congressional committees; the Secretary of Defense; the Deputy Secretary of Defense; the Secretaries of the Army, Navy, and Air Force; and the Under Secretaries of Defense (Acquisition, Technology, and Logistics) and (Comptroller). We will also provide copies to others on request. In addition, the report will be available at no charge on the GAO Web site at http://www.gao.gov. Should you have any questions on matters discussed in this report, please call me at (202) 512-4841. Other contacts and staff acknowledgments are listed in appendix III. In response to 2002 national defense authorization requirements, the Under Secretary of Defense for Acquisition, Technology, and Logistics and the military departments developed and implemented policies for a program review structure to oversee large-dollar and program-critical services acquisitions. The review process, modeled after DOD's review process for major weapons systems, seeks to ensure major service acquisition strategies are adequately planned, performance-based, competed, and address socioeconomic goals. In most cases, an acquisition must be valued at $500 million or more to prompt review at the headquarters level for DOD and the military departments. Table 2 compares selected aspects of the legislation's requirements with, and the implementation status of, DOD and military department policies. In addition to those named above, Cordell Smith, Bob Swierczek, and Ralph White made key contributions to this report.

The Department of Defense's (DOD) spending on service contracts approaches $100 billion annually, but recent legislation directs DOD to manage its services procurement more effectively. Leading companies transformed management practices and achieved major savings after they analyzed spending patterns and coordinated procurement. This report evaluates DOD's implementation of the legislation in light of congressional interest in promoting the use of best commercial practices for acquiring services. DOD and the military departments each have a management structure in place for reviewing individual services acquisitions valued at $500 million or more, but that approach does not provide a departmentwide assessment of how spending for services could be more effective. Greater attention is needed by DOD management to promote a strategic orientation by setting performance goals, including savings goals, and ensuring accountability for achieving them. To support management decisions and improve visibility over spending on service contracts, DOD is developing an automated system to collect and analyze data by piloting a spend analysis. The analysis views spending from a DOD-wide perspective and identifies large-scale savings opportunities, but its scope is limited, and it is too early to tell how the department can make the best use of its results. The military departments are in the early stages of separate initiatives that may lead them to adopt a strategic approach to buying services, but DOD lacks a plan that coordinates these initiatives or provides a road map for future efforts.

The administration of federal elections is a massive enterprise, conducted primarily at the state and local level, under applicable state and federal voting laws. Responsibility for holding elections and ensuring that each voter has the ability to fully participate in the electoral process--including registering to vote, accessing polling places or alternative voting methods, and casting a vote--primarily rests with state and local governments. While federal elections are generally conducted under state laws and policies, several federal laws apply to voting and some provisions specifically address accessibility issues for voters with disabilities, including the Americans with Disabilities Act of 1990 (ADA) and HAVA. Title II and III of the ADA contain provisions that help increase the accessibility of voting for individuals with disabilities. Specifically, Title II and its implementing regulations require that people with disabilities have access to basic public services, including the right to vote. The ADA requires that public entities make reasonable modifications in policies, practices, or procedures to avoid discrimination against people with disabilities. Moreover, no person with a disability may, by reason of disability, be excluded from participating in or be denied the benefits of any public program, service, or activity. State and local governments may generally comply with ADA accessibility requirements in a variety of ways, such as reassigning services to accessible buildings or alternative Title III of the ADA generally covers commercial accessible sites.facilities and places of public accommodation that may also be used as polling places. Public accommodations must make reasonable modifications in policies, practices, or procedures to facilitate access for people with disabilities. These facilities are also required to remove physical barriers in existing buildings when it is "readily achievable" to do so; that is, when the removal can be done without much difficulty or expense, given the entity's resources. HAVA, which contains a number of provisions to help increase voting accessibility for people with disabilities, establishes the Election Assistance Commission (EAC) and grants the Attorney General enforcement authority. In particular, section 301(a) of HAVA outlines This minimum standards for voting systems used in federal elections.section specifically states that the voting system must be accessible for people with disabilities, including nonvisual accessibility for the blind and visually impaired, in a manner that provides the same opportunity for access and participation as is provided for other voters. To satisfy this requirement, each polling place must have at least one direct recording electronic or other voting system equipped for people with disabilities. HAVA also established the EAC as an agency with wide-ranging duties to help improve state and local administration of federal elections, including providing voluntary state guidance on implementing HAVA provisions. The EAC also has authority to make grants for the research and development of new voting equipment and technologies and the improvement of voting systems. Additionally, HAVA vests enforcement authority with the Attorney General to bring a civil action against any state or jurisdiction as may be necessary to carry out specified uniform and nondiscriminatory election technology and administration requirements under HAVA. As the proportion of older Americans in the country increases, the number of voters residing in long-term care facilities who may face challenges voting at polling places on Election Day due to their physical and mental condition could also increase. By 2030, those aged 65 and over are projected to grow to more than 72 million individuals and represent a quarter of the voting age population. Older voters, who consistently vote in higher proportions than other voters, may face challenges exercising their right to vote because disability increases with age. Moreover, it is estimated that 70 percent of people over age 65 will require some long- term care services at some point in their lives, such as residing in a nursing home or assisted living facility. The physical and cognitive impairments of many long-term care facility residents may make it more difficult for them to independently drive, walk, or use public transportation to get to their designated polling place. Once at the polling place, they may face challenges finding accessible parking, reaching the ballot area, and casting a ballot privately and independently. We recently issued two reports on elections in which the findings may have implications for voters with disabilities. Specifically, in 2012, we issued a report examining state laws addressing voter registration and voting on or before Election Day. In the report, we found that states had been active in the past 10 years in amending their election codes, regulations, and procedures, not only to incorporate requirements mandated by HAVA, but also in making substantive changes to their laws in the areas of voter identification, early voting, and requirements for third- party voter registration organizations. We found that states had a variety of identification requirements for voters when they register to vote, vote at the polls on Election Day, and seek to cast an absentee ballot by mail that were in effect for the November 2012 election. Specifically, while voter identification requirements varied in flexibility, the number and type of documents allowed, and alternatives available for verifying identity, 31 states had requirements for all eligible voters to show identification at the polls on Election Day. We also found that most states had also established alternatives for voters to cast a ballot other than at the polls on Election Day. Thirty-five states and the District of Columbia provided an opportunity for voters to cast a ballot prior to the election without an excuse, either by no-excuse absentee voting by mail or in-person early voting, or both. States also regulated the process by which voters registered to vote and had a variety of requirements that address third- party voter registration organizations that conduct voter registration drives. In addition, in 2012, we issued a report looking at the potential implementation of weekend voting and similar alternative voting methods. In the report, we found that in the 2010 general election, 35 states and the District provided voters at least one alternative to casting their ballot on Election Day through in-person early voting, no-excuse absentee voting, or voting by mail. However, state and local election officials we interviewed identified challenges they would anticipate facing in planning and conducting Election Day activities on weekends-- specifically, finding poll workers and polling places, and securing ballots and voting equipment--and expected cost increases. Specifically, officials in 14 of the 17 jurisdictions and the District expected that at least some of the polling places they used in past elections--such as churches--would not be available for a weekend election, and anticipated difficulty finding replacements. Additionally, officials in 5 of the 7 states and the District that conducted early voting and provided security over multiple days explained that the level of planning needed for overnight security for a weekend election would far surpass that of early voting due to the greater number and variety of Election Day polling places. For example, officials in one state said that for the 2010 general election, the state had fewer than 300 early voting sites--which were selected to ensure security-- compared to more than 2,750 polling places on Election Day, which are generally selected based on availability and proximity to voters. In comparison to our findings in 2000, the proportion of polling places with no potential impediments increased in 2008. In 2008, we estimated that 27 percent of polling places had no potential impediments in the path from the parking area to the voting area--up from 16 percent in 2000. Specifically, polling places with four or more potential impediments decreased significantly--from 29 percent in 2000 to 16 percent in 2008 (see fig. 1). Potential impediments included a lack of accessible parking and obstacles en route from the parking area to the voting area. Figure 2 shows some key polling place features that we examined in our 2008 review of polling places. These features primarily affect individuals with mobility impairments, in particular voters using wheelchairs. Similar to our findings in 2000, the majority of potential impediments at polling places in 2008 occurred outside of or at the building entrance, although improvements were made in some areas. In particular, the percentage of polling places with potential impediments at the building entrance dropped sharply--from 59 percent in 2000 to 25 percent in 2008. In addition, polling places made significant gains in providing designated parking for people with disabilities, which decreased from 32 percent with no designated parking in 2000 to only 3 percent in 2008 (see fig. 3).ramps or curb cuts in the parking area, unpaved or poor surfaces in the path from the parking lot or route to the building entrance, and door thresholds exceeding 1/2 inch in height. We did not assess polling places' legal compliance with HAVA accessible voting system requirements. For our 2008 Election Day data collection instrument, we compiled a list of commonly known accessible voting machines by consulting with disability experts and others. From shortly after the passage of HAVA until 2006, Justice officials provided educational outreach and guidance on polling place accessibility and conducted an initial assessment of states' compliance with HAVA's January 2006 deadline for accessible voting systems.guidance on the new HAVA voting system requirements while the EAC Justice provided was being formed. During this time, Justice officials said they made a considerable effort to educate state and local election officials and national organizations representing election officials and people with disabilities on HAVA voting system requirements. As part of these early efforts, Justice provided guidance to poll workers on how to assess and create a physically accessible polling place. Specifically, in 2004, Justice published the Americans with Disabilities Act: ADA Checklist for Polling Places, which provided information to voting officials on key accessibility features needed by most voters with disabilities to go from the parking area to the voting area. According to our survey, 34 states found the checklist to be moderately to very helpful. While the checklist provides limited guidance on accessibility features within the voting area, it does not provide information about the configuration of the voting system. In addition to early guidance, Justice also conducted an initial assessment of states' progress toward meeting the January 2006 deadline for compliance with HAVA voting system requirements. For example, in 2003, Justice sent letters to state election officials summarizing HAVA voting system requirements. Justice later followed up with letters in 2005 and 2006, which outlined HAVA voting system requirements, and asked states to respond to a series of questions to help gauge whether every polling place in the state had at least one accessible voting machine and whether poll workers were trained in the machine's operation. Finally, with the full implementation of HAVA in 2006, the EAC took over Justice's state educational outreach and guidance efforts. Justice's limited oversight of HAVA voting system requirements and polling place accessibility, by 2009, left gaps in ensuring voting accessibility for people with disabilities. For example, Justice supervised polling place observations for federal elections on Election Day 2008, primarily to assess compliance with the Voting Rights Act of 1965. However, Justice did not systematically assess the physical accessibility of the polling places or the level of privacy and independence provided to people with disabilities by the accessible voting system, which limited the department's ability to identify potential accessibility issues facing voters with disabilities. In addition, Justice initiated a small number of annual community assessments--called Civic Access assessments--of ADA compliance in public buildings, including buildings designated as polling places, but these assessments included a small portion of polling places nationwide and were generally not conducted on Election Day. According to Justice, these assessments could be resource-intensive, which, in part, may have limited the number that the department could complete in a given year. Justice initiated Civic Access assessments for three communities in calendar year 2008. When onsite reviews identified physical barriers and impediments for people with disabilities, Justice generally negotiated and entered into a settlement agreement with the election jurisdiction. Between 2000 and 2008, Justice entered into 69 Civic Access settlement agreements containing one or more recommendations aimed at polling place provisions, but given the small number of Civic Access assessments conducted annually, they did not provide a national perspective on polling place accessibility. In addition, since these assessments were not conducted during elections, they did not assess any special features of voting areas and accessible voting systems that are set up only on Election Day. In our 2009 report on polling place accessibility, we recommended that the Department of Justice look for opportunities to expand its monitoring and oversight of the accessibility of polling places for people with disabilities in a cost-effective manner. This effort might include: working with states to use existing state oversight mechanisms and using other resources, such as organizations representing election officials and disability advocacy organizations, to help assess and monitor states' progress in ensuring polling place accessibility, similar to the effort used to determine state compliance with HAVA voting system requirements by the 2006 deadline; expanding the scope of Election Day observations to include an assessment of the physical access to the voting area and the level of privacy and independence being offered to voters with disabilities by accessible voting systems; and expanding the Americans with Disabilities Act: ADA Checklist of Polling Places to include additional information on the accessibility of the voting area and guidance on the configuration of the accessible voting system to provide voters with disabilities with the same level of privacy and independence as is afforded to other voters. Justice generally agreed with this recommendation in commenting on the draft report, and when we reached out for an update in preparation of this testimony, indicated it has taken steps towards addressing the recommendation. For example, Justice noted that it has entered into settlements--with Philadelphia, Pennsylvania, in 2009 and Flint, Michigan, in 2012--to resolve allegations of inaccessible polling places. In addition, Justice stated that it has expanded the scope of Election Day observations to include an assessment of the physical accessibility of polling places, citing its monitoring of 240 polling places in about 28 jurisdictions for the 2012 general election. However, Justice did not indicate whether its expanded Election Day observations include assessing privacy and independence provided by accessible voting systems. Further, it does not appear at this time that Justice has taken action to expand the scope of the ADA Checklist for Polling Places to include additional information on the accessibility of the voting area and guidance on the configuration of the accessible voting system. We believe that expanding these additional steps could build upon Justice's efforts to date in potentially reducing voting impediments and other challenges for voters with disabilities. Mr. Chairman, this concludes my statement. I would be pleased to respond to any questions you or other Members of the Council may have. Further information about this statement, please contact Barbara Bovbjerg 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 testimony. Other key contributors to this statement include: Brett Fallavollita, Assistant Director; David Lin; Ryan Siegel; and Amber Yancey-Carroll. Additional contributions were made by David Alexander, Orin Atwater, Rebecca Gambler, Alex Galuten, Tom Jessor; Kathy Leslie, Mimi Nguyen, Barbara Stolz, Janet Temko, Jeff Tessin, and Walter Vance. 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.

Voting is fundamental to our democracy and federal law generally requires polling places to be accessible to all eligible voters, including those with disabilities and the elderly. However during the 2000 federal election, GAO found that only 16 percent of polling places had no potential impediments to voting access for people with disabilities. To address these and other issues, Congress enacted the Help America Vote Act of 2002 (HAVA), which required each polling place to have an accessible voting system by 2006. Congress asked GAO to reassess voting access on Election Day 2008, and also to study voter accessibility at long-term care facilities. This statement focuses on (1) progress made from 2000 to 2008 to improve voter accessibility in polling places, including relevancy to long-term care facilities and (2) steps the Department of Justice (Justice) has taken to enforce HAVA voting access provisions. To prepare this statement, GAO relied primarily on its prior products on polling place accessibility ( GAO-09-941 ) and voting in long-term care facilities ( GAO-10-6 ). Compared to 2000, the proportion of polling places in 2008 without potential impediments increased and almost all polling places had an accessible voting system as states and localities made various efforts to help facilitate accessible voting. In 2008, based upon GAO's survey of polling places, GAO estimated that 27 percent of polling places had no potential impediments in the path from the parking to the voting area--up from16 percent in 2000; 45 percent had potential impediments but offered curbside voting; and the remaining 27 percent had potential impediments and did not offer curbside voting. All but one polling place GAO visited had an accessible voting system--typically, an electronic machine in a voting station--to facilitate private and independent voting for people with disabilities. However, 46 percent of polling places had an accessible voting system that could pose a challenge to certain voters with disabilities, such as voting stations that were not arranged to accommodate voters using wheelchairs. In GAO's 2008 state survey, 43 states reported that they set accessibility standards for polling places, up from 23 states in 2000. Further, 31 states reported that ensuring polling place accessibility was challenging. Localities GAO surveyed in 2008 reported providing voting services directly to long-term care facility residents who may face challenges voting in a polling place. For example, close to one-third of localities GAO surveyed reported designating long-term care facilities as Election Day polling places. From shortly after the passage of HAVA until 2006, Justice provided guidance on polling place accessibility and conducted an initial assessment of states' compliance with HAVA's January 2006 deadline for accessible voting systems. After implementation of HAVA, Justice's oversight of HAVA's access requirements was part of two other enforcement efforts, but gaps remained. While Justice provided guidance on polling place accessibility, this guidance did not address accessibility of the voting area itself. In 2009, Justice conducted polling place observations for federal elections that identified whether accessible voting systems were in place, but it did not systematically assess the physical accessibility of polling places or the level of privacy and independence provided to voters with disabilities. Justice also conducted a small number of annual community assessments of Americans with Disabilities Act compliance of public buildings, which included buildings designated as polling places. However, these assessments did not provide a national perspective on polling place accessibility or assess any special features of the voting area and the accessible voting system that are set up only on Election Day. GAO previously recommended that Justice expand its monitoring and oversight of polling place accessibility. Justice generally agreed with our recommendation and has reported taking some steps towards addressing it, such as expanding Election Day observations to include an assessment of physical accessibility.

This section discusses significant matters that we considered in performing our audit and in forming our conclusions. These matters include (1) six material weaknesses in IRS' internal controls, (2) one reportable condition representing a significant weakness in IRS' internal controls, (3) one instance of noncompliance with laws and regulations and noncompliance with the requirements of FFMIA, and (4) two other significant matters that represent important issues that should be brought to the attention of IRS management and other users of IRS' Custodial Financial Statements and other reported financial information. During our audit of IRS' fiscal year 1997 Custodial Financial Statements, we identified six material weaknesses that adversely affected IRS' ability to safeguard assets from material loss, assure material compliance with relevant laws and regulations, and assure that there were no material misstatements in the financial statements. These weaknesses relate to IRS' inadequate general ledger system, supporting subsidiary ledger for unpaid assessments, supporting documentation for unpaid assessments, controls over refunds, revenue accounting and reporting, and computer security. These material weaknesses were consistent in all significant respects with the material weaknesses cited by IRS in its fiscal year 1997 FIA report. Although we were able to apply substantive audit procedures to verify that IRS' fiscal year 1997 Custodial Financial Statements were reliable, the six material weaknesses discussed in the following sections significantly increase the risk that future financial statements and other IRS reports may be materially misstated. The IRS' general ledger system is not able to routinely generate reliable and timely financial information for internal and external users. The IRS' general ledger does not capture or otherwise produce the information to be reported in the Statement of Custodial Assets and Liabilities; classify revenue receipts activity by type of tax at the detail transaction level to support IRS' Statement of Custodial Activity and to make possible the accurate distribution of excise tax collections to the appropriate trust funds; use the standard federal accounting classification structure to produce some of the basic documents needed for the preparation of financial statements in the required formats, such as trial balances; and provide a complete audit trail for recorded transactions. As a result of these deficiencies, IRS is unable to rely on its general ledger to support its financial statements, which is a core purpose of a general ledger. These problems also prevent IRS from producing financial statements on a monthly or quarterly basis as a management tool, which is standard practice in private industry and some federal entities. The U.S. Government Standard General Ledger (SGL) establishes the general ledger account structure for federal agencies as well as the rules for agencies to follow in recording financial events. Implementation of the SGL is called for by the Core Financial System Requirements of the Joint Financial Management Improvement Program (JFMIP), and is required by the Office of Management and Budget (OMB) in its Circular A-127, Financial Management Systems. Implementation of financial management systems that comply with the SGL at the transaction level is also required by FFMIA. However, because of the problems discussed above, IRS' general ledger does not comply with these requirements. As we previously reported, IRS' general ledger was not designed to support financial statement preparation. To compensate for this deficiency, IRS utilizes specialized computer programs to extract information from its master files--its only detailed database of taxpayer information--to derive amounts to be reported in the financial statements. However, the amounts produced by this approach needed material audit adjustments to the Statement of Custodial Assets and Liabilities to produce reliable financial statements. Although we were able to verify that the adjusted balances were reliable as of and for the fiscal year ended September 30, 1997, this approach cannot substitute for a properly designed and implemented general ledger as a tool to account for and report financial transactions on a routine basis throughout the year. As we have reported in our previous financial audits, IRS does not have a detailed listing, or subsidiary ledger, which tracks and accumulates unpaid assessments on an ongoing basis. To compensate for the lack of a subsidiary ledger, IRS runs computer programs against its master files to identify and classify the universe of unpaid assessments. However, this approach required numerous audit adjustments to produce reliable balances. The lack of a detailed subsidiary ledger impairs IRS' ability to effectively manage the unpaid assessments. For example, IRS' current systems precluded it from ensuring that all parties liable for certain assessments get credit for payments made on those assessments. Specifically, payments made on unpaid payroll tax withholdings for a troubled company, which can be collectible from multiple individuals, are not always credited to each responsible party to reflect the reduction in their tax liability. In 53 of 83 cases we reviewed involving multiple individuals and companies, we found that payments were not accurately recorded to reflect the reduction in the tax liability of each responsible party. In one case we reviewed, three individuals had multimillion dollar tax liability balances, as well as liens placed against their property, even though the tax had been fully paid by the company. While we were able to determine that the amounts reported in the fiscal year 1997 financial statements pertaining to taxes receivable, a component of unpaid assessments, were reliable, this was only after significant adjustments totaling tens of billions of dollars were made. The extensive reliance IRS must place on ad hoc procedures significantly increases the risk of material misstatement of unpaid assessments and/or other reports issued by IRS in the future. A proper subsidiary ledger for unpaid assessments, as recommended by the JFMIP Core Financial Systems Requirements, is necessary to provide management with complete, up-to-date information about the unpaid assessments due from each taxpayer, so that managers will be in a position to make informed decisions about collection efforts and collectibility estimates. This requires a subsidiary ledger that makes readily available to management the amount, nature, and age of all unpaid assessments outstanding by tax liability and taxpayer, and that can be readily and routinely reconciled to corresponding general ledger balances for financial reporting purposes. Such a system should also track and make available key information necessary to assess collectibility, such as account status, payment and default history, and installment agreement terms. In our audit of IRS' fiscal year 1996 Custodial Financial Statements, we reported that IRS could not locate sufficient supporting documentation to (1) enable us to evaluate the existence and classification of unpaid assessments or (2) support its classification of reported revenue collections and refunds paid. During our fiscal year 1997 audit, IRS was able to locate and provide sufficient supporting documentation for fiscal year 1997 revenue and refund transactions we tested. However, IRS continued to experience significant problems locating and providing supporting documentation for unpaid assessments, primarily due to the age of the items. Documentation for transactions we reviewed, such as tax returns or installment agreements, had often been destroyed in accordance with IRS record retention policies or could not be located. In addition, the documentation IRS provided did not always include useful information, such as appraisals, asset searches, and financial statements. For example, estate case files we reviewed generally did not include audited financial statements or an independent appraisal of the estate's assets, information that would greatly assist in determining the potential collectibility and potential underreporting of these cases. Additionally, the lack of documentation made it difficult to assess the classification and collectibility of unpaid assessments reported in the financial statements as federal tax receivables. Through our audit procedures, we were able to verify the existence and proper classification of unpaid assessments and obtain reasonable assurance that reported balances were reliable. However, this required material audit adjustments to correct misstated unpaid assessment balances identified by our testing. IRS did not have sufficient preventive controls over refunds to assure that inappropriate payments for tax refunds are not disbursed. Such inappropriate payments have taken the form of refunds improperly issued or inflated, which IRS did not identify because of flawed verification procedures, or fraud by IRS employees. For example, we found three instances where refunds were paid for inappropriate amounts. This occurred because IRS does not compare tax returns to the attached W-2s (Wage and Tax Statements) at the time the returns are initially processed, and consequently did not detect a discrepancy with pertinent information on the tax return. As we have reported in prior audits, such inconsistencies generally go undetected until such time as IRS completes its document matching program, which can take as long as 18 months. In addition, during fiscal year 1997, IRS identified alleged employee embezzlement of refunds totaling over $269,000. IRS is also vulnerable to issuance of duplicate refunds made possible by gaps in IRS' controls. IRS reported this condition as a material weakness in its fiscal year 1997 FIA report. The control weaknesses over refunds are magnified by significant levels of invalid Earned Income Credit (EIC) claims. IRS recently reported that during the period January 1995 through April 1995, an estimated $4.4 billion (25 percent) in EIC claims filed were invalid. This estimate does not reflect actual disbursements made for refunds involving EIC claims. However, it provides an indication of the magnitude of IRS' and the federal government's exposure to losses resulting from weak controls over refunds. While we were able to substantiate the amounts disbursed as refunds as reported on the fiscal year 1997 Custodial Financial Statements, IRS needs to have effective preventive controls in place to ensure that the federal government does not incur losses due to payment of inappropriate refunds. Once an inappropriate refund has been disbursed, IRS is compelled to expend both the time and expense to attempt to recover it, with dubious prospect of success. IRS is unable to currently determine the specific amount of revenue it actually collected for the Social Security, Hospital Insurance, Highway, and other relevant trust funds. As we previously reported, the primary reason for this weakness is that the accounting information needed to validate the taxpayer's liability and record the payment to the proper trust fund is not provided at the time that taxpayers remit payments. Information is provided on the tax return, which can be received as late as 9 months after a payment is submitted. However, the information on the return only pertains to the amount of the tax liability, not the distribution of the amounts previously collected. As a result, IRS cannot report actual revenue collected for Social Security, Hospital Insurance, Highway, and other trust funds on a current basis nor can it accurately report revenue collected for individuals. Because of this weakness, IRS had to report Federal Insurance Contributions Act (FICA) and individual income tax collections in the same line item on its Statement of Custodial Activity for fiscal year 1997. However, requirements for the form and content of governmentwide financial statements require separate reporting of Social Security, Hospital Insurance, and individual income taxes collected. Beginning in fiscal year 1998, federal accounting standards will also require this reporting. Taxes collected by IRS on behalf of the federal government are deposited in the general revenue fund of the Department of the Treasury (Treasury), where they are subsequently distributed to the appropriate trust funds. Amounts representing Social Security and Hospital Insurance taxes are distributed to their respective trust funds based on information certified by the Social Security Administration (SSA). In contrast, for excise taxes, IRS certifies the amounts to be distributed based on taxes assessed, as reflected on the relevant tax forms. However, by law, distributions of excise taxes are to be based on taxes actually collected. The manner in which both FICA and excise taxes are distributed creates a condition in which the federal government's general revenue fund subsidizes the Social Security, Hospital Insurance, Highway, and other trust funds. The subsidy occurs primarily because a significant number of businesses that file tax returns for Social Security, Hospital Insurance, and excise taxes ultimately go bankrupt or otherwise go out of business and never actually pay the assessed amounts. Additionally, with respect to Social Security and Hospital Insurance taxes, a significant number of self-employed individuals also do not pay the assessed amounts. While the subsidy is not necessarily significant with respect to excise taxes, it is significant for Social Security and Hospital Insurance taxes. At September 30, 1997, the estimated amount of unpaid taxes and interest in IRS' unpaid assessments balance was approximately $44 billion for Social Security and Hospital Insurance, and approximately $1 billion for excise taxes. While these totals do not include amounts no longer in the unpaid assessments balance due to the expiration of the statutory collection period, they nevertheless give an indication of the cumulative amount of the subsidy. IRS places extensive reliance on computer systems to process tax returns, maintain taxpayer data, calculate interest and penalties, and generate refunds. Consequently, it is critical that IRS maintain adequate internal controls over these systems. We previously reported that IRS had serious weaknesses in the controls used to safeguard its computer systems, facilities, and taxpayer data. Our review of these controls as part of our audit of IRS' fiscal year 1997 Custodial Financial Statements found that although many improvements have been made, overall controls continued to be ineffective. IRS' controls over automated systems continued to exhibit serious weaknesses in (1) physical security, (2) logical security, (3) data communications management, (4) risk analysis, (5) quality assurance, (6) internal audit and security, and (7) contingency planning. Weaknesses in these areas can allow unauthorized individuals access to critical hardware and software where they may intentionally or inadvertently add, alter, or delete sensitive data or programs. IRS recognized these weaknesses in its fiscal year 1997 FIA report and has corrected a significant number of the computer security weaknesses identified in our previous reports. Additionally, IRS has centralized responsibility for security and privacy issues and added staff in this area. IRS is implementing plans to mitigate the remaining weaknesses by June 1999. In our fiscal year 1997 audit, we were able to verify the accuracy of the financial statement balances and disclosures originating in whole or in part from automated systems primarily through review and testing of supporting documentation. However, the absence of effective internal controls over IRS' automated systems makes IRS vulnerable to losses, delays or interruptions in service, and compromising of the sensitive information entrusted to IRS by taxpayers. In addition to the material weaknesses discussed above, we identified one reportable condition that although not a material weakness, represents a significant deficiency in the design or operation of internal controls and could adversely affect IRS' ability to meet the internal control objectives described in this report. This condition concerns weaknesses in IRS' controls over its manually processed tax receipts. IRS' controls over the receipt of cash and checks it manually receives from taxpayers are not adequate to assure that these payments will be properly credited to taxpayer accounts and deposited in the Treasury. To ensure that appropriate security over these receipts is maintained, IRS requires that lock box depositories receiving payments on its behalf use a surveillance camera to monitor staff when they open mail containing cash and checks. However, we found that payments received at the four IRS service centers where we tested controls over manual cash receipts were not subject to comparable controls. We found at these locations that (1) IRS allowed individuals to open mail unobserved, and relied on them to accurately report amounts received, and (2) payments received were not logged or otherwise recorded at the point of receipt to immediately establish accountability and thereby deter and detect diversion. In addition, at one service center, we observed payments being received by personnel who should not have been authorized to accept receipts. As a result of these weaknesses, IRS is vulnerable to losses of cash and checks received from taxpayers in payment of taxes due. In fact, between 1995 and 1997, IRS identified instances of actual or alleged employee embezzlement of receipts totaling about $4.6 million. These actual and alleged embezzlements underscore the need for effective internal controls over the IRS' service center receipts process. Our tests of compliance with selected provisions of laws and regulations disclosed one instance of noncompliance that is reportable under generally accepted government auditing standards and OMB Bulletin 93-06 Audit Requirements for Federal Financial Statements. This concerns IRS' noncompliance with a provision of the Internal Revenue Code concerning certification of excise taxes. We also noted that IRS' financial management systems do not substantially comply with the requirements of FFMIA, which is reportable under OMB Bulletin 98-04. IRS policies and procedures for certification to Treasury of the distribution of the excise tax collections to the designated trust funds do not comply with the Internal Revenue Code. The Code requires IRS to certify the distribution of these excise tax collections to the recipient trust funds based on actual collections. However, as we have reported previously,and as discussed earlier in this report, IRS based its certifications of excise tax amounts to be distributed to specific trust funds on the assessed amount, or amount owed, as reflected on the tax returns filed by taxpayers. IRS has studied various options to enable it to make final certifications of amounts to be distributed based on actual collections and to develop the underlying information needed to support such certifications. IRS was in the process of finalizing its proposed solution at the conclusion of our fiscal year 1996 audit; however, through the end of our fiscal year 1997 audit, IRS still had not implemented its proposed solution. For example, in December 1997, IRS certified the third quarter of fiscal year 1997 based on assessments rather than collections. As the auditor of IRS' Custodial Financial Statements, we are reporting under FFMIA on whether IRS' financial management systems substantially comply with the Federal Financial Management System Requirements (FFMSR), applicable federal accounting standards, and the SGL at the transaction level. As indicated by the material weaknesses we discussed earlier, IRS' systems do not substantially comply with these requirements. For example, as noted previously, IRS does not have a general ledger that conforms with the SGL. Additionally, IRS lacks a subsidiary ledger for its unpaid assessments, and lacks an effective audit trail from its general ledger back to transaction source documents. These are all requirements under FFMSR. The other three material weaknesses we discussed above--controls over refunds, revenue accounting and reporting, and computer security--also are conditions indicating that IRS' systems do not comply with FFMSR. In addition, the material weaknesses we noted above mean that IRS' systems cannot produce reliable financial statements and related disclosures that conform with applicable federal accounting standards. Since IRS' systems do not comply with FFMSR, applicable federal accounting standards, and the SGL, they also do not comply with OMB Circular A-127, Financial Management Systems. We have previously reported on many of these issues and made recommendations for corrective actions. IRS has drafted a plan of action intended to incrementally improve its financial reporting capabilities, which is scheduled to be fully implemented during fiscal year 1999. This plan is intended to bring IRS' general ledger into conformance with the SGL and would be a step toward compliance with FFMSR. However, the plan falls short of fully meeting FFMSR requirements. For example, the plan will not provide for (1) full traceability of information through its systems (i.e., lack of an audit trail), (2) a subsidiary ledger to assist in distinguishing federal tax receivables from other unpaid assessments, and (3) reporting of revenue by tax type. As discussed later in this report, the latter example has implications for IRS' ability to meet certain federal accounting standards required to be implemented in fiscal year 1998. IRS also has a longer-range plan to address the financial management system deficiencies noted in prior audits and in IRS' own self-assessment. During future audits, we will monitor IRS' implementation of these initiatives, and assess their effectiveness in resolving the material weaknesses discussed in this report. In addition to the material weaknesses and other reportable conditions and noncompliance with laws and regulations and FFMIA requirements discussed in the previous sections, we identified two other significant matters that we believe should be brought to the attention of IRS management and other users of IRS' financial statements and other financial reports. These concern (1) the composition and collectibility of IRS' unpaid assessments and (2) the importance of IRS successfully preparing its automated systems for the year 2000. As reflected in the supplemental information to IRS' fiscal year 1997 Custodial Financial Statements, the unpaid assessments balance was about $214 billion as of September 30, 1997. This unpaid assessments balance has historically been referred to as IRS' taxes receivable or accounts receivable. However, a significant portion of this balance is not considered a receivable. Also, a substantial portion of the amounts considered receivables is largely uncollectible. Under federal accounting standards, unpaid assessments require taxpayer or court agreement to be considered federal taxes receivable. Assessments not agreed to by taxpayers or the courts are considered compliance assessments and are not considered federal taxes receivable. Assessments with little or no future collection potential are called write-offs. Figure 1 depicts the components of the unpaid assessments balance as of September 30, 1997. Taxes Receivable - Uncollectible ($62) Compliance Assessments ($48) Of the $214 billion balance of unpaid assessments, $76 billion represents write-offs. Write-offs principally consist of amounts owed by bankrupt or defunct businesses, including many failed financial institutions resolved by the Federal Deposit Insurance Corporation (FDIC) and the former Resolution Trust Corporation (RTC). As noted above, write-offs have little or no future collection potential. In addition, $48 billion of the unpaid assessments balance represents amounts that have not been agreed to by either the taxpayer or a court. Due to the lack of agreement, these compliance assessments are likely to have less potential for future collection than those unpaid assessments that are considered federal taxes receivable. The remaining $90 billion of unpaid assessments represent federal taxes receivable. About $62 billion (70 percent) of this balance is estimated to be uncollectible due primarily to the taxpayer's economic situation, such as individual taxpayers who are unemployed or have other financial problems. However, IRS may continue collection action for 10 years after the assessment or longer under certain conditions. Thus these accounts may still ultimately have some collection potential if the taxpayer's economic condition improves. About $28 billion, or about 30 percent, of federal taxes receivable is estimated to be collectible. Components of the collectible balance include installment agreements with estates and individuals, as well as relatively newer amounts due from individuals and businesses who have a history of compliance. It is also important to note that of the unpaid assessments balance, about $136 billion (over 60 percent) represents interest and penalties, as depicted in figure 2, which are largely uncollectible. Interest and Penalties ($136) Interest and penalties are such a high percentage of the balance because IRS continues to accrue them through the 10-year statutory collection date, regardless of whether an account meets the criteria for financial statement recognition or has any collection potential. For example, interest and penalties continue to accrue on write-offs, such as FDIC and RTC cases, as well as on exam assessments where the taxpayers have not agreed to the validity of the assessments. The overall growth in unpaid assessments during fiscal year 1997 was wholly attributable to the accrual of interest and penalties. It is critical that IRS successfully prepare its automated systems in order to overcome the potential problems associated with the year 2000. The Year 2000 problem is rooted in the way dates are recorded and calculated in many computer systems. For the past several decades, systems have typically used two digits to represent the year in order to conserve on electronic data storage and reduce operating costs. With this two-digit format, however, the year 2000 is indistinguishable from the year 1900. As a result, system or application programs that use dates to perform calculations, comparisons, or sorting may generate incorrect results when working with years after 1999. IRS has underway one of the largest conversion efforts in the civilian sector. IRS has established a schedule to renovate its automated systems in five segments, with all renovation efforts scheduled for completion by January 1999 in order to allow a full year of operational testing. However, with less than 2 years remaining until the year 2000 arrives, the task of completing the conversion on time is formidable. If IRS is unable to make its automated systems Year 2000 compliant, IRS could be rendered unable to properly process tax returns, issue refunds, correctly calculate interest and penalties, effectively collect taxes, or prepare accurate financial statements and other financial reports. We are working with the Congress and the executive branch to monitor progress made by federal agencies and identify specific recommendations for resolving the Year 2000 problem, which we reported as a governmentwide high risk area and which the President has designated as a priority management objective. In addition to the weaknesses discussed above, we noted other, less significant matters involving IRS' system of accounting controls and its operations which we will be reporting separately to IRS. The Custodial Financial Statements, including the accompanying notes, present fairly, in all material respects, and in conformity with a comprehensive basis of accounting other than generally accepted accounting principles, as described in note 1, IRS' custodial assets and liabilities and custodial activity. Although the weaknesses described above precluded IRS' internal controls from achieving the internal control objectives discussed previously, we were nevertheless able to obtain reasonable assurance that the Custodial Financial Statements were reliable through the use of substantive audit procedures. However, misstatements may nevertheless occur in other financial information reported by IRS as a result of the internal control weaknesses described above. As discussed in the notes to the fiscal year 1997 Custodial Financial Statements, IRS has attempted, to the extent practical, to implement early the provisions of Statement of Federal Financial Accounting Standards (SFFAS) No. 7, Accounting for Revenue and Other Financing Sources and Concepts for Reconciling Budgetary and Financial Accounting. SFFAS No. 7 is not effective until fiscal year 1998. However, the requirement that this standard be fully implemented in fiscal year 1998 has significant implications for IRS and its fiscal year 1998 Custodial Financial Statements. The significant internal control and system weaknesses discussed earlier may affect IRS' ability to implement this standard until corrective actions have fully resolved these weaknesses. For example, as discussed earlier, IRS currently does not capture information at the time of receipt of payments from the taxpayer on how such payments are to be applied to the various trust funds. Consequently, IRS is presently unable to report collections of tax revenue by specific tax type as envisioned in SFFAS No. 7 and OMB's Format and Instructions for the Form and Content of the Financial Statements of the U.S. Government (September 2, 1997). Other provisions of SFFAS No. 7 will also be difficult for IRS to implement in the short term until the significant internal control and systems issues reported in prior audits and discussed above are resolved. We evaluated IRS management's assertion about the effectiveness of its internal controls designed to safeguard assets against loss from unauthorized acquisition, use, or assure the execution of transactions in accordance with laws governing the use of budget authority and other laws and regulations that have a direct and material effect on the Custodial Financial Statements or are listed in OMB audit guidance and could have a material effect on the Custodial Financial Statements; and properly record, process, and summarize transactions to permit the preparation of reliable financial statements and to maintain accountability for assets. IRS management asserted that except for the material weaknesses in internal controls presented in the agency's fiscal year 1997 FIA report on compliance with the internal control and accounting standards, internal controls provided reasonable assurance that the above internal control objectives were satisfied during fiscal year 1997. Management made this assertion based upon criteria established under FIA and OMB Circular A-123, Management Accountability and Control. Our internal control work would not necessarily disclose material weaknesses not reported by IRS. However, we believe that IRS' internal controls, taken as a whole, were not effective in satisfying the control objectives discussed above during fiscal year 1997 because of the severity of the material weaknesses in internal controls described in this report, which were also cited by IRS in its fiscal year 1997 FIA report. Except as noted above, our tests of compliance with selected provisions of laws and regulations disclosed no other instances of noncompliance which we consider to be reportable under generally accepted government auditing standards or OMB Bulletin 93-06. Under FFMIA and OMB Bulletin 98-04, our tests disclosed, as discussed above, that IRS' financial management systems do not substantially comply with the requirements for the following: federal financial management systems, applicable federal accounting standards, and the U.S. Government Standard General Ledger at the transaction level. However, the objective of our audit was not to provide an opinion on overall compliance with laws, regulations, and FFMIA requirements tested. Accordingly, we do not express such an opinion. IRS' overview and supplemental information contain various data, some of which are not directly related to the Custodial Financial Statements. We do not express an overall opinion on this information. However, we compared this information for consistency with the Custodial Financial Statements and, based on our limited work, found no material inconsistencies. preparing the annual Custodial Financial Statements in conformity with the basis of accounting described in note 1; establishing, maintaining, and assessing internal controls to provide reasonable assurance that the broad control objectives of FIA are met; and complying with applicable laws and regulations and FFMIA requirements. We are responsible for obtaining reasonable assurance about whether (1) the Custodial Financial Statements are reliable (free of material misstatements and presented fairly, in all material respects, in conformity with the basis of accounting described in note 1), and (2) management's assertion about the effectiveness of internal controls is fairly stated, in all material respects, based upon criteria established under the Federal Managers' Financial Integrity Act of 1982 and OMB Circular A-123, Management Accountability and Control. We are also responsible for testing compliance with selected provisions of laws and regulations, for reporting on compliance with FFMIA requirements, and for performing limited procedures with respect to certain other information appearing in these annual Custodial Financial Statements. In order to fulfill these responsibilities, we examined, on a test basis, evidence supporting the amounts and disclosures in the Custodial Financial Statements; assessed the accounting principles used and significant estimates made by management in the preparation of the Custodial Financial Statements; evaluated the overall presentation of the Custodial Financial Statements; obtained an understanding of internal controls related to safeguarding assets, compliance with laws and regulations, including execution of transactions in accordance with budget authority and financial reporting; tested relevant internal controls over safeguarding, compliance, and financial reporting and evaluated management's assertion about the effectiveness of internal controls; tested compliance with selected provisions of the following laws and regulations: Internal Revenue Code (appendix I), Debt Collection Act, as amended {31 U.S.C. SS 3720A}, Government Management Reform Act of 1994 {31 U.S.C. SS 3515, 3521 (e)-(f)}, and Federal Managers' Financial Integrity Act of 1982 {31 U.S.C. SS 3512(d)}; tested whether IRS' financial management systems substantially comply with the requirements of the Federal Financial Management Improvement Act of 1996, including Federal Financial Management Systems Requirements, applicable federal accounting standards, and the U.S. Government Standard General Ledger at the transaction level. We did not evaluate all internal controls relevant to operating objectives as broadly defined by FIA, such as those controls relevant to preparing statistical reports and ensuring efficient operations. We limited our internal control testing to those controls necessary to achieve the objectives outlined in our opinion on management's assertion about the effectiveness of internal controls. As the auditor of IRS' Custodial Financial Statements, we are reporting under FFMIA on whether the agency's financial management systems substantially comply with the Federal Financial Management Systems Requirements, applicable federal accounting standards, and the U.S. Government Standard General Ledger at the transaction level. In making this report, we considered the implementation guidance for FFMIA issued by OMB on September 9, 1997. The IRS' Custodial Financial Statements do not reflect the potential impact of any excess of taxes due in accordance with the Internal Revenue Code, over taxes actually assessed by IRS, often referred to as the "tax gap." SFFAS No. 7 specifically excludes the "tax gap" from financial statement reporting requirements. Consequently, the Custodial Financial Statements do not consider the impact of the tax gap. We performed our work in accordance with generally accepted government auditing standards and OMB Bulletin 93-06. In commenting on a draft of this report, IRS stated that it generally agreed with the findings and conclusions in the report. IRS acknowledged the internal control weaknesses and noncompliance with laws and regulations we cited, and discussed initiatives underway to address many of the issues raised in the report. We will evaluate the effectiveness of IRS' corrective actions as part of our audit of IRS' fiscal year 1998 Custodial Financial Statements. However, we do not agree with IRS' assertion that it needs a change in legislation to obtain information from taxpayers at the time of remittance to properly allocate excise tax payments to the various trust funds. We recognize that resolution of many of these issues could take several years. IRS agreed with our conclusion that its financial management systems do not comply with the Federal Financial Management Systems Requirements and the U.S. Government Standard General Ledger requirements of the Federal Financial Management Improvement Act of 1996. However, IRS believes that its current accounting and financial reporting process complies with applicable federal accounting standards. OMB's September 9, 1997, memorandum on implementation guidance for FFMIA specifies two indicators that must be present to indicate compliance with federal accounting standards. First, the agency generally should receive an unqualified opinion on its financial statements. Second, there should be no material weaknesses in internal controls that affect the agency's ability to prepare auditable financial statements and related disclosures. As we reported, IRS received an unqualified opinion on its financial statements. However, as discussed in this report, we identified six material weaknesses in IRS' internal controls. As a result of these weaknesses, IRS' financial management systems are unable to produce reliable financial statements and related disclosures without extensive ad hoc procedures and tens of billions of dollars in adjustments. Consequently, IRS' financial management systems are not in compliance with applicable federal accounting standards requirements. IRS' written comments are included in appendix II. Thomas Armstrong, Assistant General Counsel Andrea Levine, 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. 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Pursuant to a legislative requirement, GAO examined the Internal Revenue Service's (IRS) custodial financial statements for fiscal year (FY) ending September 30, 1997. GAO noted that: (1) the IRS custodial financial statements were reliable in all material respects; (2) IRS management's assertion about the effectiveness of internal controls stated that except for the material weaknesses in internal controls presented in the agency's FY 1997 Federal Managers' Financial Integrity Act (FIA) report, internal controls were effective in satisfying the following objectives: (a) safeguarding assets from material loss; (b) assuring material compliance with laws governing the use of budget authority and with other relevant laws and regulations; and (c) assuring that there were no other material misstatements in the custodial financial statements; (3) however, GAO found that IRS' internal controls, taken as a whole, were not effective in satisfying these objectives; (5) due to the severity of the material weaknesses in IRS' financial accounting and reporting controls, all of which were reported in IRS' FY 1997 FIA report, extensive reliance on ad hoc programming and analysis was needed to develop financial statement line item balances, and the resulting amounts needed material audit adjustments to produce reliable custodial financial statements; and (6) one reportable noncompliance with selected provisions of laws and regulations GAO tested, and that IRS' financial management systems do not substantially comply with the requirements of the Federal Financial Management Improvement Act of 1996.

The State OIG, as currently constituted, was established by the Omnibus Diplomatic Security and Antiterrorism Act of 1986, which expanded on the 1985 amendments to the Inspector General Act of 1978 (IG Act), as an independent office to prevent and detect fraud, waste, abuse, and mismanagement in the department's programs and operations; conduct and supervise audits and investigations; and recommend policies to promote economy, efficiency, and effectiveness. The State OIG is unique among federal inspectors general in its history and responsibilities due to a statutory requirement for the OIG to provide inspections of the department's bureaus and posts worldwide. From 1906 until 1957, inspections were to be carried out at least once every 2 years and were viewed as a management function, and not a function of an independent inspector general. In 1957, the State Department administratively established an Inspector General of Foreign Service, which was the first inspector general office within the State Department to conduct inspections. Congress enacted legislation in 1961 and in 1980 creating statutory inspectors general who were tasked with performing inspections on certain State Department activities. In 1978, GAO reviewed the IG's inspection reports and questioned the independence of Foreign Service officers who were temporarily detailed to the IG's office and recommended the elimination of this requirement. The 1980 legislation, section 209(a) of the Foreign Service Act, required the State IG to inspect every foreign service post, bureau, or other operating unit in the State Department at least once every 5 years. In 1982, we reviewed the IG's operations and noted that the 5-year inspection cycle led to problems with the IG's effectiveness by limiting the ability to do other work. In addition, we continued to question the use of Foreign Service officers and other persons from operational units within the department to staff the IG office. In 1986, reacting to concerns similar to those expressed in our 1982 report, Congress made the State IG a presidentially appointed inspector general subject to the Inspector General Act and prohibited a career member of the Foreign Service from being appointed as the State IG. Starting in 1996 and continuing until today, Congress, in the Department of State appropriations acts, annually waives the 5-year statutory requirement for inspections. However, while the inspection requirement is waived annually by Congress, the State IG continues to conduct inspections as part of its plan for oversight of the department. The State OIG's inspection responsibilities encompass a wide range of objectives, which include reviewing whether department policy goals are achieved and whether the interests of the United States are represented and advanced effectively. In addition, the State OIG is assigned responsibility for specialized security inspections in support of the department's mission to provide effective protection to its personnel, facilities, and sensitive intelligence information. Inspections are defined by the Council of the Inspectors General on Integrity and Efficiency (CIGIE) as a process that evaluates reviews, studies, and analyzes the programs and activities of an agency for the purposes of providing information to managers for decision making; making recommendations for improvements to programs, polices, or procedures; and identifying where administrative action may be necessary. There are fundamental differences between inspections and audits. Inspections and audits are typically conducted under separate standards with different basic requirements. That is, IGs are required by the IG Act to conduct audits in accordance with Government Auditing Standards (also known as generally accepted government auditing standards). In contrast, the IGs follow CIGIE's Quality Standards for Inspection and Evaluation when conducting inspections as required by law. By d audits performed under Government Auditing Standards are subject to more in-depth requirements for levels of evidence and documentation supporting the findings than are inspections performed under CIGIE's inspection standards. Also, auditing standards require external quality reviews of audit organizations (peer reviews) on a 3-year cycle, while inspection standards do not require such external reviews. According to CIGIE, inspections provide the benefits of a flexible mechanism for optimizing resources, expanding agency coverage, and using alternative review methods and techniques. However, as reported by a recent peer review performed by the National Aeronautics and Space Administration (NASA) IG, the State OIG's Middle East Regional Office did not always provide audits consistent with generally accepted government auditing standards (GAGAS). Consequently, because these audits were not performed in accordance with GAGAS, they were reclassified by the OIG as inspections. Independence is a fundamental principle to the auditing profession and the most critical element for IG effectiveness. Without independence, an audit organization cannot conduct independent audits in compliance with generally accepted government auditing standards. Likewise, an IG who lacks independence cannot effectively fulfill the full range of requirement of the office. Lacking this critical attribute, an audit organization's wor might be classified as studies, research re ports, consulting reports, or reviews, rather than independent audits. Quality Standards for Federal Offices of Inspector General adopted by CIGIE includes requirements for IG independence. Specifically, IG their staff must be free both in fact and appearance from personal, external, and organizational impairments to their independence. The IG s and their staff have a responsibility to maintain independence so that opinions, conclusions, judgments, and recommendations will be im and viewed as impartial by knowledgeable third parties. Likewise, Government Auditing Standards states: "in all matters relating to work, the audit organization and the individual auditor, whether government or public, must be free from personal, external, and organizational impairments to independence and must avoid the appearance of such impairments to independence. Auditors and audit organizations must maintain independence so that their opinions, find conclusions, judgments, and recommendations will be impartial and viewed as impartial by objective th ird parties with knowledge of the relevant information." Personal independence applies to individual auditors at all levels o audit organization, including the head of the organization. Personal independence refers to the auditor's ability to remain objective and maintain an independent attitude in all matters relating to the audit, as well as the auditor's ability to be recognized by others as independent. The es not auditor is to have an independent and objective state of mind that do allow personal bias or the undue influence of others to override the auditor's professional judgments. This attitude is also referred to as intellectual honesty. The auditor must also be free from direct financial or managerial involvement with the audited entity or other potential c of interest tha independent. t might create the perception that the auditor is not The IG's personal independence and appearance of independence to knowledgeable third parties is critical to IG decision making related to th he nature and scope of audit and investigative work to be performed by t IG office. The IG's personal independence must be maintained when conducting any audit and investigative work and when making decisions to pursue and the nature and scope of the to determine the type of work individual audits themselves. External independence refers to both the auditor's and the audit organization's freedom to make independent and objective judgmen o from external influences or pressures. Examples of impairments t external independence include restrictions on access to records, government officials, or other individuals needed to conduct the audit; external interference over the assignment, appointment, compensation, promotion of audit personnel; restrictions on funds or other resou provided to the audit organization that adversely affect the audit organization's ability to carry out its responsibilities; or external authority rces to overrule or to inappropriately influence the auditors' judgment as to appropriate reporting content. The IG Act provides the IGs with protections against impairments to external independence by providing that IGs have access to all agency documents and records, prompt access to the agency head, and the authority to independently (1) select and appoint IG staff, (2) obtain services of experts, and (3) enter into contracts. The IGs may choose whether to exercise the act's specific authority to obtain access to information that is denied by agency officials. In addition, the IG Act granted the IGs additional insulation from impairment of external independence by requiring that IGs report the results of their work in semiannual reports to Congress without alteration by their respective agencies, and that these reports generally are to be made available to the general public. The IG Act also directed the IGs to keep their agency heads and Congress fully and currently informed of any deficiencies, abuses, fraud, or other serious problems relating to the administration of programs and operations of their agencies. Also, the IGs are required to report particularly serious or flagrant problems, abuses, or deficiencies immediately to their agency heads, who are required to transmit the IG's report to Congress within 7 calendar days. Organizational independence refers to the audit organization's placement in relation to the activities being audited. Professional auditing standards have different criteria for organizational independence for external and internal audit organizations. The IGs, in their statutory role of providing oversight of their agencies' operations, represent a unique hybrid including some characteristics of both external and internal reporting responsibilities. For example, the IGs have external-reporting requirements outside their agencies, such as to the Congress, which are consistent with the reporting requirements for external auditors. At the same time the IGs are part of their respective agencies and must also keep their agency heads, as well as the Congress, concurrently informed. The IG Act provides specific protections to the IGs' organizational independence including the requirement that IGs report only to their agency heads and not to lower-level management. The head of the agency may delegate supervision of the IG only to the officer next below in rank, and is prohibited from preventing the IG from initiating, carrying out, or completing any audit or investigation. In addition, IGs in large federal departments and agencies, such as the State Department, are appointed by the President and confirmed by the Senate. Only the President has the authority to remove these IGs and can do so only after explaining the reasons to the Congress 30 days before taking action. The Inspector General Reform Act of 2008 provided additional enhancements to overall IG independence that included establishing CIGIE by statute to continually address areas of weakness and vulnerability to fraud, waste, and abuse in federal programs and operations; requiring that IGs have their own legal counsel or use other specified counsel; and requiring that the budget amounts requested by the IGs for their operations be included in the overall agency-budget requests to the President and the Congress. In March 2007, we reported on two areas of continuing concern regarding the independence of the State OIG. These concerns involved the appointment of management officials to head the State OIG in an acting capacity for extended periods of time and the use of Foreign Service staff to lead State OIG inspections. These concerns were similar to independence issues we reported in 1978 and 1982 regarding Foreign Service officers temporarily detailed from program offices to the IG's office and inspection staff reassigned to and from management offices within the department. In response to concerns about personal impairments to the State IG's independence, the act that created the current IG office prohibits a career Foreign Service official from becoming an IG of the State Department. Nevertheless, our 2007 review found that during a period of approximately 27 months, from January 2003 through April 2005, four management officials from the State Department served as an acting State IG. All four of these officials had served in the Foreign Service in prior management positions, including political appointments as U.S. ambassadors to foreign countries. In addition, we also found that three of the officials returned to significant management positions in the State Department after serving as acting IGs. We found that acting IG positions continue to be used and are filled by officials with prior management positions at the department. Independence concerns surrounding such acting appointments are additionally troublesome when the acting IG position is held for such prolonged periods. (See table 1.) Another independence concern discussed in our March 2007 report is the use of Foreign Service officers to lead inspections of the department's bureaus and posts. We found it was State OIG policy for inspections to be led by ambassador-level Foreign Service officers. These Foreign Service officers frequently move through the OIG on rotational assignments. As Foreign Service officers, they are expected to help formulate, implement, and defend government policy which now, as team leaders for the IG's inspections, they are expected to review. These officers may return to Foreign Service positions in the department after their rotation through the OIG which could be viewed as compromising the OIG's independence. Specifically, the appearance of objectivity is severely limited by this potential impairment to independence resulting in a detrimental effect to the quality of the inspection results. In our 2007 audit, we found that the State OIG's emphasis on inspections limited its effectiveness because it resulted in gaps in the audit coverage of the State Department's high-risk areas and management challenges. These critical areas were covered almost exclusively through OIG inspections that were not subject to the same level of scrutiny that would have been the case if covered by audits. Specifically, we found gaps of OIG audit coverage in key State Department programs and operations such as (1) information security, (2) human resources, (3) counterterrorism and border security, and (4) public diplomacy. In these areas the State OIG was relying on inspections rather than audits for oversight. In the 10 inspections that we examined, we found that the State OIG inspectors relied heavily on invalidated agency responses to questionnaires completed by the department staff at each inspected bureau or post. We did not find any additional testing of evidence or sampling of agency responses to determine the relevance, validity, and reliability of the evidence as would be required under auditing standards. In addition, we found that for 43 of the 183 recommendations contained in the 10 inspections we reviewed, the related inspection files did not contain any documented support beyond written report summaries of the findings and recommendations. In our 2007 report we also found that inspections by the OIG's Office of Information Technology were not included in the internal quality reviews that the OIG conducts of its own work. Information security is a high-risk area and management challenge for the State Department, and the OIG relied almost exclusively on inspections for oversight of this area. Therefore, the quality of these inspections is key to the OIG's oversight effectiveness. In addition, CIGIE's standards for inspections require that IG inspections be part of a quality-control mechanism that provides an assessment of the inspection work. We found in 2007 that there was inadequate assurance that the investigative efforts of the State Department were coordinated to avoid duplication or to ensure that independent OIG investigations of the department would be performed. Specifically, while part of its worldwide responsibilities for law enforcement and security operations, the department's Bureau of Diplomatic Security(DS) performed investigations that included passport and visa fraud, both externally and within the department; these investigations were not coordinated with the OIG investigators. The IG Act, as amended, authorizes the State IG to conduct and supervise independent investigations and prevent and detect fraud, waste, abuse, and mismanagement throughout the State Department. DS performs its investigations as a function of management, reporting to the State Department Undersecretary for Management. In contrast, the State OIG is required by the IG Act to be independent of the offices and functions it investigates. We reported in 2007 that without a formal agreement to outline the responsibilities of both DS and the State OIG regarding these investigations, there was inadequate assurance that this work would be coordinated to avoid duplication or that independent OIG investigations of the department would be performed. To address the concerns we raised in our March 2007 report we made five recommendations. To help ensure the independence of the IG Office, which also impacts the effectiveness of the office, we recommended that the IG work with the Secretary of State to (1) develop a succession-planning policy for the appointment of individuals to head the State IG office in an acting capacity that provides for independent coverage between IG appointments and also to prohibit career Foreign Service officers and other department managers from heading the State OIG in an acting capacity, and (2) develop options to ensure that State OIG inspections are not led by career Foreign Service officials or other staff who rotate to assignments within State Department management. We also made the following three recommendations to the State IG to address the effectiveness of the OIG: (1) help ensure that the State IG provides the appropriate breath and depth of oversight of the State Department's high-risk areas and management challenges, reassess the proper mix of audit and inspection coverage for these areas; (2) provide for more complete internal quality reviews of inspections, include inspections performed by the State IG's Office of Information Technology in the OIG's internal quality review process; and (3) develop a formal written agreement with the Bureau of Diplomatic Security to coordinate departmental investigations in order to provide for more independent investigations of State Department management and to prevent duplicative investigations. In response to a draft of our 2007 report, the State OIG has implemented two recommendations and has taken actions related to the remaining three recommendations. Although the State OIG has not fully addressed a recommendation that has been the subject of GAO recommendations regarding the independence of the State OIG's inspections since our 1978 report, there has also been some progress in this area. The OIG implemented our recommendation to include inspections performed by the Office of Information Technology in its internal quality review process in June 2008, by abolishing the State OIG's Office of Information Technology and transferring staff into either the Office of Audits or into the Office of Inspections. As a result, the OIG's information technology inspections are now included in the Office of Inspections' internal quality-review process. The OIG has implemented our recommendation that the office work with the Secretary of State and the Bureau of Diplomatic Security (DS) to develop a formal written agreement that delineates the areas of responsibility for State Department investigations. In December 2010, the State IG's investigative office completed an agreement with the bureau's Assistant Director of Domestic Operations to address the coordination of investigative activities. This agreement, when fully implemented, should help to ensure proper coordination of these offices in their investigations. Regarding a succession plan for filling acting IGs positions, the State Deputy IG stated that he issued a memo to abolish the deputy IG for Foreign Service position to help ensure that any future deputy IG moving into an acting IG position would not be a Foreign Service officer. The Deputy IG stated that he is currently working with the department to update the Foreign Affairs Manual to reflect this change. Furthermore, the elimination of this position helps to strengthen the independence of the OIG. We believe the State IG's changes are responsive to the recommendation made in our 2007 report. Nevertheless, the State Department has relied on acting IGs to provide oversight for over 5 of the last 8 years since January 2003. (See table 1.) This use of temporarily assigned State Department management staff to head the State OIG can affect the perceived independence of the entire office in its oversight of the department's operations, and the practice is questionable when compared to the independence requirements of Government Auditing Standards and other professional standards followed by the IGs. Further, career members of the Foreign Service are prohibited by statute from being appointed as State IG. This exclusion helps to protect against the personal impairments to independence that could result when a Foreign Service officer reviews the bureaus and posts of fellow Foreign Service officers and diplomats. Regarding our recommendation to reassess the mix of audits and inspections for the appropriate breadth and depth of oversight coverage, especially in high-risk areas and management challenges, we noted gaps in audit coverage. Specifically, in both fiscal years 2009 and 2010, the OIG had gaps in the audit coverage of management challenges in the areas of (1) coordinating foreign assistance, (2) public diplomacy, and (3) human resources. However, the State OIG has made progress in planning for and providing additional audit coverage. Since 2007 the State OIG's resources have increased, providing the opportunity to augment its audit oversight of the department. Specifically, the OIG's total on board staff increased to 227, from 191 in at the end of fiscal year 2005. Also, the OIG's audit staff increased to 64 compared to 54 at the end of fiscal year 2005. In addition, the Office of Audits and the Middle East Regional Office are planning to merge resulting in the OIG's largest component. In January 2010, the State OIG reorganized the focus of the Office of Audits and began to align its oversight efforts with the department's growing global mission and strategic priorities. The newly reorganized Office of Audit consists of six functional divisions and an audit operations division to address (1) contracts and grants, (2) information technology, (3) financial management, (4) international programs, (5) human capital and infrastructure, (6) security and intelligence, and (7) audit operations, which includes quality assurance. These audit areas are intended to develop expertise and address the department's management challenges. According to the Office of Audits Fiscal Year 2011 Performance Plan, the office will target high-cost programs, key management challenges, and vital operations to provide managers with information that will assist them in making operational decisions. The 2011 plan includes new areas such as global health, food security, climate change, democracy and governance, and human resource issues within the State Department. In addition, with the assistance of an independent public accountant, the State OIG has completed an audit of a major issue in coordinating foreign assistance, the Global HIV/AIDS Initiative related to the President's emergency plan for AIDS relief. Regarding our recommendation concerning the use of career Foreign Service officials to lead inspection teams, the State OIG's inspections handbook requires that the team leaders for inspections be a Foreign Service officer at the rank of ambassador. We also stated in our 2007 report that experience and expertise are important on inspection teams, but the expert need not be the team leader. However, the Deputy IG stated that having Foreign Service officers with the rank of ambassador as team leaders is critical to the effectiveness of the inspection teams. OIG officials stated that there are currently six Foreign Service officers at the ambassador level serving as the team leaders for inspections, four of whom are rehired annuitants working for the State OIG. To address independence impairments the State OIG relies on a recusal policy where Foreign Service officers must self-report whether they have worked in a post or embassy that is subject to an inspection and therefore presents a possible impairment. Further, State OIG officials noted that the team leaders report to a civil service Assistant IG and the inspection teams include other members of the civil service. We continue to believe that the State OIG's use of management staff who have the possibility of returning to management positions, even if they are rehired annuitants or currently report to civil service employees in the OIG, presents at least an appearance of impaired independence and is not fully consistent with professional standards. The mission of the State OIG is critical to providing independent and objective oversight of the State Department and identifying mismanagement of taxpayer dollars. While the IG Act provides each IG with the ability to exercise judgment in the use of protections to independence specified in the act, the ultimate success or failure of an IG office is largely determined by the individual IG placed in that office and that person's ability to maintain personal, external, and organizational independence both in fact and appearance, while reporting the results of the office's work to both the agency head and to the Congress. An IG who lacks independence cannot effectively fulfill the full range of requirements for this office. The State OIG has either implemented or is in the process of implementing the recommendations from our 2007 report, with the exception of our recommendation to discontinue the use of Foreign Service officers as team leaders for inspections. We remain concerned about the independence issues that can arise from such an arrangement. In addition, we remain concerned that a permanent IG has not been appointed at the State Department for almost 3 years. We commend the OIG for the steps it is taking to build and strengthen its audit practice, and we are re-emphasizing our 2007 recommendation for the OIG to reassess its mix of audit and inspections to achieve effective oversight of the department's areas of high risk and management challenges. Madam Chairman Ros-Lehtinen, Ranking Member Berman, and Members of the Committee, this concludes my prepared statement. I would be happy to respond to any questions you or other Members of the Committee might have at this time. 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.

In 2007 GAO reported on concerns with the independence and effectiveness of the Department of State Inspector General (State OIG). GAO was asked to provide testimony on the issues we raised and the status of recommendations made to the State OIG in that report. This testimony focuses on the importance of auditor and IG independence, GAO's prior concerns with the State OIG's independence and effectiveness, and the status of OIG actions to address GAO's recommendations. The testimony is primarily based on GAO's 2007 report conducted in accordance with generally accepted government auditing standards, as well as the activities conducted to follow up on the status of our previous recommendations. The State Department Office of Inspector General (State OIG) has a critical responsibility in preventing and detecting fraud, waste, abuse, and mismanagement; and in providing independent audits and investigations of the department's programs and operations. In addition, the Foreign Service Act of 1980 requires the State OIG to perform inspections of the department's bureaus and posts, which is a unique requirement for an IG office. Independence is a critical element to the quality and credibility of an IG's work under the IG Act and is fundamental to professional auditing standards as well as an essential element of IG effectiveness. An IG must be independent and free from personal, external, and organizational impairments to independence in order to effectively fulfill the full range of requirements for the office. GAO's 2007 report identified areas of concern regarding the State OIG's independence and effectiveness. Specifically, the appointment of management and Foreign Service officials to head the State OIG in an acting capacity for extended periods of time is not consistent with professional standards for independence. In addition, GAO reported that the use of Foreign Service officers at the ambassador level to lead OIG inspections resulted in, at a minimum, the appearance of independence impairment. GAO also reported that inspections, by design, are conducted under less in-depth requirements and do not provide the same level of assurance as audits. However, the OIG relied on inspections rather than audits to provide oversight coverage, resulting in gaps to the audit oversight of the department. GAO also reported that inspections performed by the OIG's Office of Information Technology (IT) were not part of an internal quality review process, and that the State OIG and the department's Bureau of Diplomatic Security (DS) lacked an agreement to coordinate their investigative activities. The State OIG implemented two of GAO's five recommendations and has actions under way related to the remaining three. Specifically, the OIG now includes IT-related inspections in its internal quality-review process and has completed an agreement to coordinate investigations with DS. Also, the OIG is implementing a change to the succession planning for acting IG positions to exclude Foreign Service officers and is in the process of increasing the level of audit coverage through the distribution of staff and audit planning. In addition, the State OIG continues to assign Foreign Service officers at the ambassador level as team leaders for inspections, however, four of the six officers are rehired annuitants unlikely to rotate to State Department Foreign Service positions. GAO remains concerned, however, about the OIG's use of Foreign Service officers and the State Department's need to rely on acting IGs for extended periods of time. GAO continues to reaffirm its recommendations, and encourages the State OIG, with the assistance of the Secretary, to fully address these recommendations to enhance the effectiveness of the OIG's oversight of the State Department's programs and operations. In the 2007 report, GAO recommended that the IG work with the Secretary of State to address two recommendations regarding concerns about the State OIG's independence, and to reassess the mix of audits and inspections to help provide effective audit coverage of the department. In addition, GAO recommended that the IG include inspections performed by the OIG's Office of Information Technology in its internal quality review process and that it work with the department's Bureau of Diplomatic Security (DS) on an agreement to coordinate their investigative efforts.

Although the specific duties police officers perform may vary among police forces, federal uniformed police officers are generally responsible for providing security and safety to people and property within and sometimes surrounding federal buildings. There are a number of federal uniformed police forces operating in the Washington MSA, of which 13 had 50 or more officers as of September 30, 2001. Table 1 shows the 13 federal uniformed police forces included in our review and the number of officers in each of the police forces as of September 30, 2002. On November 25, 2002, the Homeland Security Act of 2002 was enacted into law. The act, among other things, restructured parts of the executive branch of the federal government to better address the threat to the United States posed by terrorism. The act established a new Department of Homeland Security (DHS), which includes two uniformed police forces within the scope of our review--the Federal Protective Service and the Secret Service Uniformed Division. These police forces were formerly components of the General Services Administration and the Department of the Treasury, respectively. Another component of DHS is the TSA, which protects the nation's transportation systems. TSA, which was formerly a component of the Department of Transportation, includes the Federal Air Marshal Service, which is designed to provide protection against hijacking and terrorist attacks on domestic and international airline flights. The Federal Air Marshal Program increased significantly after the September 11, 2001, terrorist attacks, resulting in the need for TSA to recruit many Air Marshals during fiscal year 2002. By fiscal year 2003, the buildup in the Federal Air Marshal Program had been substantially completed. Federal Air Marshals are not limited to the grade and pay step structure of the federal government's General Schedule. As a result, TSA has been able to offer air marshal recruits higher compensation and more flexible benefit packages than many other federal police forces. Federal uniformed police forces operate under various compensation systems. Some federal police forces are covered by the General Schedule pay system and others are covered by different pay systems authorized by various laws. Since 1984, all new federal employees have been covered by the Federal Employees Retirement System (FERS). Federal police forces provide either standard federal retirement benefits or federal law enforcement retirement benefits. Studies of employee retention indicate that turnover is a complex and multifaceted problem. People leave their jobs for a variety of reasons. Compensation is often cited as a primary reason for employee turnover. However, nonpay factors, such as age, job tenure, job satisfaction, and job location, may also affect individuals' decisions to leave their jobs. During recent years, the federal government has implemented many human capital flexibilities to help agencies attract and retain sufficient numbers of high-quality employees to complete their missions. Human capital flexibilities can include actions related to areas such as recruitment, retention, competition, position classification, incentive awards and recognition, training and development, and work-life policies. We have stated in recent reports that the effective, efficient, and transparent use of human capital flexibilities must be a key component of agency efforts to address human capital challenges. The tailored use of such flexibilities for recruiting and retaining high-quality employees is an important cornerstone of our model of strategic human capital management. To address our objectives, we identified federal uniformed police forces with 50 or more officers in the Washington MSA--13 in all. Specifically, we reviewed OPM data to determine the executive branch federal uniformed police forces with 50 or more police officers in the Washington MSA. We reviewed a prior report issued by the Department of Justice's Bureau of Justice Statistics and our prior reports to determine the judicial and legislative branches' federal uniformed police forces with 50 or more police officers in the Washington MSA. In addressing each of the objectives, we interviewed officials responsible for human capital issues at each of the 13 police forces and obtained documents on recruitment and retention issues. Using this information, we created a survey and distributed it to the 13 police forces to obtain information on (1) entry-level officer pay and benefits, types of officer duties, and minimum entry-level officer qualifications; (2) officer turnover rates and the availability and use of human capital flexibilities to retain officers; and (3) difficulties in recruiting officers, and the availability and use of human capital flexibilities to improve recruiting. We reviewed and analyzed the police forces' responses for completeness and accuracy and followed-up on any missing or unclear responses with appropriate officials. Where possible, we verified the data using OPM's Central Personnel Data File. In reviewing duties performed by police officers at the 13 police forces, we relied on information provided by police force officials and did not perform a detailed analysis of the differences in duties and responsibilities. Additionally, due to resource limitations, we did not survey officers who separated from the police forces to determine their reasons for leaving. We obtained this information from officials at the police forces. Although some of the police forces have police officers detailed at locations throughout the country, the data in this report are only for officers stationed in the Washington MSA. Therefore, these data are not projectable nationwide. Entry-level pay and retirement benefits varied widely across the 13 police forces. Annual pay for entry-level police officers ranged from $28,801 to $39,427, as of September 30, 2002. Officers at 4 of the 13 police forces received federal law enforcement retirement benefits, while officers at the remaining 9 police forces received standard federal employee retirement benefits. According to officials, all 13 police forces performed many of the same types of general duties, such as protecting people and property and screening people and materials entering and/or exiting buildings under their jurisdictions. Eleven of the 13 police forces had specialized teams and functions, such as K-9 and/or SWAT. The minimum qualification requirements and the selection processes were generally similar among most of the 13 police forces. At $39,427 per year, the U.S. Capitol Police, Library of Congress Police, and Supreme Court Police forces had the highest starting salaries for entry-level officers, while entry-level officers at the NIH Police and Federal Protective Service received the lowest starting salaries at $28,801 per year. The salaries for officers at the remaining 8 police forces ranged from $29,917 to $38,695. Entry-level officers at 5 of the 13 police forces received an increase in pay, ranging from $788 to $1,702, upon successful completion of basic training. Four of the 13 police forces received federal law enforcement retirement benefits and received among the highest starting salaries, ranging from $37,063 to $39,427. Figure 1 provides a comparison of entry-level officer pay and retirement benefits at the 13 police forces. Entry-level officers at 12 of the 13 police forces (all but the U.S. Postal Service Police) received increases in their starting salaries between October 1, 2002, and April 1, 2003. Entry-level officers at three of the four police forces (FBI Police, Federal Protective Service, and NIH Police) with the lowest entry-level salaries as of September 30, 2002, received raises of $5,584, $4,583, and $4,252, respectively, during the period ranging from October 1, 2002 through April 1, 2003. In addition, entry-level officers at both the U.S. Capitol Police and Library of Congress Police--two of the highest paid forces--also received salary increases of $3,739 during the same time period. These pay raises received by entry-level officers from October 1, 2002, through April 1, 2003, narrowed the entry-level pay gap for some of the 13 forces. For example, as of September 30, 2002, entry- level officers at the FBI Police received a salary $8,168 less than an entry- level officer at the U.S. Capitol Police. However, as of April 1, 2003, the pay gap between entry-level officers at the two forces had narrowed to $6,323. Figure 2 provides information on pay increases that entry-level officers received from October 1, 2002, through April 1, 2003, along with entry-level officer pay rates as of April 1, 2003. The Secret Service noted that the Uniformed Division has full police powers in Washington, D.C., and that it further has the authority to perform its protective duties throughout the United States. Although there are similarities in the general duties, there were differences among the police forces with respect to the extent to which they performed specialized functions. Table 3 shows that 11 of the 13 police forces reported that they performed at least one specialized function; 2 police forces (Government Printing Office Police and U.S. Postal Service Police) reported that they did not perform specialized functions. The minimum qualification requirements and the selection processes were generally similar among most of the 13 police forces. As part of the selection process, all 13 police forces required new hires to have successfully completed an application, an interview(s), a medical examination, a background investigation, and a drug test. Each force also had at least one additional requirement, such as a security clearance or physical fitness evaluation. The U.S. Postal Service Police was the only force that did not require a high school diploma or prior law enforcement experience. For additional information on qualification requirements and the selection process for the 13 police forces, see appendix IV. Total turnover at the 13 police forces nearly doubled from fiscal years 2001 to 2002. Additionally, during fiscal year 2002, 8 of the 13 police forces experienced their highest annual turnover rates over the 6-year period, from fiscal years 1997 through 2002. There were sizable differences in turnover rates among the 13 police forces during fiscal year 2002. NIH Police reported the highest turnover rate at 58 percent. The turnover rates for the remaining 12 police forces ranged from 11 percent to 41 percent. Of the 729 officers who separated from the 13 police forces in fiscal year 2002, about 82 percent (599), excluding retirements, voluntarily separated. About 53 percent (316) of the 599 officers who voluntarily separated from the police forces in fiscal year 2002 went to TSA. Additionally, about 65 percent of the officers who voluntarily separated from the 13 police forces during fiscal year 2002 had fewer than 5 years of service on their police forces. The total number of separations at all 13 police forces nearly doubled (from 375 to 729) between fiscal years 2001 and 2002. Turnover increased at all but 1 of the police forces (Library of Congress Police) over this period. The most significant increases in turnover occurred at the Bureau of Engraving and Printing Police (200 percent) and the Secret Service Uniformed Division (about 152 percent). In addition, during fiscal year 2002, 8 of the 13 police forces experienced their highest annual turnover rates over the 6-year period, from fiscal years 1997 through 2002. Figure 3 displays the total number of separations for the 13 police forces over the 6-year period. The turnover rates at the 13 police forces ranged from 11 percent at the Library of Congress Police to 58 percent at the NIH Police in fiscal year 2002. In addition to the NIH Police, 3 other police forces had turnover rates of 25 percent or greater during fiscal year 2002. The U.S. Mint Police reported the second highest turnover rate at 41 percent, followed by the Bureau of Engraving and Printing Police at 27 percent and the Secret Service Uniformed Division at 25 percent. Table 4 shows that at each of the 13 police forces, turnover was overwhelmingly due to voluntary separations--about 18 percent (130) of turnover was due to retirements, disability, and involuntarily separations. There was no clear pattern evident between employee pay and turnover rates during fiscal year 2002. For example, while some police forces with relatively highly paid entry-level officers such as the Library of Congress Police (11 percent) and the Supreme Court Police (13 percent) had relatively low turnover rates, other police forces with relatively highly paid entry-level officers such as the U.S. Mint Police (41 percent), Bureau of Engraving and Printing Police (27 percent), and Secret Service Uniformed Division (25 percent) experienced significantly higher turnover rates. Additionally, turnover varied significantly among the 5 police forces with relatively lower paid entry-level officers. For example, while the Federal Protective Service (19 percent) and NIH Police (58 percent) entry-level officers both received the lowest starting pay, turnover differed dramatically. Likewise, no clear pattern existed regarding turnover among police forces receiving federal law enforcement retirement benefits and those receiving traditional federal retirement benefits. For example, entry-level officers at the Library of Congress Police, U.S. Capitol Police, and Supreme Court Police all received equivalent pay in fiscal year 2002. However, the Library of Congress (11 percent) had a lower turnover rate than the Capitol Police (13 percent) and Supreme Court Police (16 percent), despite the fact that officers at the latter 2 police forces received federal law enforcement retirement benefits. In addition, while officers at both the Park Police (19 percent) and Secret Service Uniformed Division (25 percent) received law enforcement retirement benefits, these forces experienced higher turnover rates than some forces such as U.S. Postal Service Police (14 percent) and FBI Police (17 percent), whose officers did not receive law enforcement retirement benefits and whose entry-level officers received lower starting salaries. More than half (316) of the 599 officers who voluntarily separated from the police forces in fiscal year 2002 went to TSA--nearly all (313 of 316) to become Federal Air Marshals where they were able to earn higher salaries, federal law enforcement retirement benefits, and a type of pay premium for unscheduled duty equaling 25 percent of their base salary. The number (316) of police officers who voluntarily separated from the 13 police forces to take positions at TSA nearly equaled the increase in the total number of separations (354) that occurred between fiscal years 2001 and 2002. About 25 percent (148) of the voluntarily separated officers accepted other federal law enforcement positions, excluding positions at TSA, and about 5 percent (32 officers) took nonlaw enforcement positions, excluding positions at TSA. Furthermore, about 9 percent (51) of the voluntarily separated officers took positions in state or local law enforcement or separated to, among other things, continue their education. Officials were unable to determine where the remaining 9 percent (52) of the voluntarily separated officers went. Table 5 provides a summary of where officers who voluntarily separated in fiscal year 2002 went. Figure 4 shows a percentage breakdown of where the 599 officers who voluntarily separated from the 13 police forces during fiscal year 2002 went. Although we did not survey individual officers to determine why they separated from these police forces, officials from the 13 forces reported a number of reasons that officers had separated, including to obtain better pay and/or benefits at other police forces, less overtime, and greater responsibility. Without surveying each of the 599 officers who voluntarily separated from their police forces in fiscal year 2002, we could not draw any definitive conclusions about the reasons they left. For additional details on turnover at the 13 police forces, see appendix II. The use of human capital flexibilities to address turnover varied among the 13 police forces. For example, officials at 4 of the 13 police forces reported that they were able to offer retention allowances, which may assist the forces in retaining experienced officers, and 3 of these police forces used this tool to retain officers in fiscal year 2002. The average retention allowances paid to officers in fiscal year 2002 were about $1,000 at the Pentagon Force Protection Agency, $3,500 at the Federal Protective Service, and more than $4,200 at the NIH Police. The police forces reported various reasons for not making greater use of available human capital flexibilities in fiscal year 2002, including lack of funding for human capital flexibilities, lack of awareness among police force officials that the human capital flexibilities were available, and lack of specific requests for certain flexibilities such as time-off awards or tuition reimbursement. The limited use of human capital flexibilities by many of the 13 police forces and the reasons provided for the limited use are consistent with our governmentwide study of the use of such authorities. In December 2002, we reported that federal agencies have not made greater use of such flexibilities for reasons such as agencies' weak strategic human capital planning, inadequate funding for using these flexibilities given competing priorities, and managers' and supervisors' lack of awareness and knowledge of the flexibilities. We further stated that the insufficient or ineffective use of flexibilities can significantly hinder the ability of agencies to recruit, hire, retain, and manage their human capital. Additionally, in May 2003, we reported that OPM can better assist agencies in using human capital flexibilities by, among other things, maximizing its efforts to make the flexibilities more widely known to agencies through compiling, analyzing, and sharing information about when, where, and how the broad range of flexibilities are being used, and should be used, to help agencies meet their human capital management needs. For additional information on human capital flexibilities at the 13 police forces, see appendix III. Nine of the 13 police forces reported difficulties recruiting officers to at least a little or some extent. Despite recruitment difficulties faced by many of the police forces, none of the police forces used important human capital recruitment flexibilities, such as recruitment bonuses and student loan repayments, in fiscal year 2002. Some police force officials reported that the human capital recruitment flexibilities were not used for various reasons, such as limited funding or that the flexibilities themselves were not available to the forces during the fiscal year 2002 recruiting cycle. Officials at 4 of the 13 police forces (Bureau of Engraving and Printing Police, the FBI Police, Federal Protective Service, and NIH Police) reported that they were having a great or very great deal of difficulty recruiting officers. In addition, officials at 5 police forces reported that they were having difficulty recruiting officers to a little or some extent or to a moderate extent. Among the reasons given for recruitment difficulties were: low pay; the high cost of living in the Washington, D.C., metropolitan area; difficulty completing the application/background investigation process; better retirement benefits at other law enforcement agencies. Conversely, officials at 4 of the 13 police forces (Library of Congress Police, the Supreme Court Police, U.S. Mint Police, and U.S. Postal Service Police) reported that they were not having difficulty recruiting officers. Library of Congress officials attributed their police force's lack of difficulty recruiting officers to attractive pay and working conditions and the ability to hire officers at any age above 20 and who also will not be subject to a mandatory retirement age. Supreme Court officials told us that their police force had solved a recent recruitment problem by focusing additional resources on recruiting and emphasizing the force's attractive work environment to potential recruits. U.S. Postal Service officials reported that their police force was not experiencing a recruitment problem because it hired its police officers from within the agency. Table 6 provides a summary of the level of recruitment difficulties reported by the 13 police forces. Although many of the police forces reported facing recruitment difficulties, none of the police forces used human capital recruitment tools, such as recruitment bonuses and student loan repayments, in fiscal year 2002. For more information on human capital flexibilities, see appendix III. Without surveying each of the 599 officers who voluntarily separated from their police forces in fiscal year 2002, we could not draw any definitive conclusions about the reasons they left. However, officials at the 13 police forces included in our review reported that officers separated from their positions for such reasons as to (1) obtain better pay and/or benefits at other police forces, (2) work less overtime, and (3) assume greater responsibility. The number of separations across the 13 police forces included in our review increased by 354 between fiscal years 2001 and 2002. This increase almost equaled the number (316) of officers who voluntarily separated from their forces to join TSA. Given that TSA's Federal Air Marshal Program has now been established, and the buildup in staffing has been substantially completed, the increase in turnover experienced in fiscal year 2002 at 12 of the 13 police forces may have been a one-time occurrence. Additionally, the recent pay increases received by officers at 12 of the 13 police forces, along with the potential implementation of various human capital flexibilities, might also help to address recruitment and retention issues experienced by many of the police forces. We requested comments on a draft of this report from each of the 13 federal uniformed police forces included in our review. We received written comments from 12 of the 13 police forces (the Federal Protective Service did not provide comments). Of the 12 police forces that commented, 11 either generally agreed with the information presented or did not express an overall opinion about the report. In its comments, the U.S. Secret Service raised four main issues relating to the pay, retirement benefits, and job responsibilities information. First, it suggested that we expand our review to include information on the compensation packages offered to separating officers, particularly those moving to TSA. However, our objective was to provide information on pay, retirement benefits, types of duties, turnover, and the use of human capital flexibilities at 13 federal uniformed police forces in the Washington, D.C. area. Our aim was not to compare the officers' previous and new job pay, benefits, responsibilities, or training requirements. Second, the U.S. Secret Service suggested that we report that a pattern existed between employee turnover and pay. However, our discussions with human capital officials in the 13 police forces found that separating officers provided them with a variety of reasons why they chose to leave their police forces, including increased pay, additional benefits, greater job satisfaction, and personal reasons. We did not contact separating officers to determine why they decided to move to other jobs and whether the new jobs was comparable in pay, benefits, and job responsibilities. Nevertheless, with the information we obtained, we were unable to discern any clear patterns between employee turnover and pay. That is, turnover varied significantly among police forces that had similar pay for entry-level officers. Third, the U.S. Secret Service suggested that we calculate the differences in retirement benefits that would accrue to officers in the different forces. We noted in our report that different forces had different retirement plans with significant differences in benefits. However, calculating the retirement benefits of a hypothetical police officer at each of the forces was beyond the scope of our review. Finally, the U.S. Secret Service noted that fundamental differences exist among the agencies' authorities, responsibilities, duties, and training requirements, and that this could account for differences in compensation. We agree that differences exist among the 13 agencies, and we captured many of these differences in the report. However, we did not attempt to determine the extent to which these differences accounted for differences in police officer compensation. We also requested and received comments from OPM. OPM was concerned that the data provided in our report will lead to unintended conclusions, citing what it considered to be a lack of substantive analysis and comparisons of the pay systems involved. OPM further commented that the data and information we report must not serve as a basis for modifying the pay structure, salaries, or retirement system of any of the police forces. Our report provides information on 13 federal uniformed police forces that had not been previously compiled, which is useful in comparing entry-level pay, retirement benefits, types of duties, turnover rates, and the use of human capital flexibilities. In preparing this report, we worked closely with these police forces to obtain reliable information on these items, as well as the conditions and challenges confronting their operations. Nevertheless, we agree that more comprehensive information would be useful in deciding how best to deal with pay, benefit, and retention issues. As the executive branch agency responsible for establishing human capital policies and monitoring their implementation, OPM is in a good position to perform the additional analysis it believes would be useful to draw conclusions on such issues. Most of the police forces and OPM provided technical comments, which were incorporated in the report, where appropriate. The Department of the Interior (U.S. Park Police), NIH, OPM, and the U.S. Supreme Court provided formal letters, and the U.S. Secret Service provided an internal memorandum, which are included in appendixes V through IX. We are sending copies of this report to the Attorney General, Secretary of the Treasury, the Secretary of Defense, the Secretary of the Department of Homeland Security, Secretary of the Interior, Chair of the Capitol Police Board, the Librarian of Congress, the Public Printer, the Marshal of the Supreme Court, the Postmaster General, the Under Secretary of Transportation for Security, and the Directors of NIH, OPM, and the Pentagon Force Protection Agency. We will also provide copies of this report to the directors of each of the 13 police forces, relevant congressional committees, and Members of Congress. We will make copies of this report available to other interested parties upon request. In addition, the report will be available at no charge on GAO's Web site at http://www.gao.gov. If you have any questions, please contact me at (202) 512-8777 or at [email protected] or Weldon McPhail, Assistant Director, at (202) 512-8644 or at [email protected]. See appendix X for additional GAO contacts and staff acknowledgments. Washington, D.C. Table 7 shows, among other things, that during fiscal year 2002, 12 of the 13 police forces experienced increased turnover from the prior fiscal year, while 8 of the 13 police forces experienced their highest turnover rates over the 6-year period, from fiscal years 1997 through 2002. Table 8 shows that officers with fewer than 5 years of experience on their forces accounted for about 65 percent of the voluntary separations in fiscal year 2002. Figure 5 shows that officers with fewer than 2 years of service on their forces accounted for about 35 percent of the voluntary separations in fiscal year 2002, and officers with 2 to 5 years of service comprised an additional 30 percent. Table 9 shows that approximately half (316) of the 599 police officers who voluntarily separated from their forces in fiscal year 2002 went to TSA. Of the 316 officers who went to TSA, about 53 percent (166) had fewer than 5 years of experience on their forces. An additional 19 percent (59) had 5 years to less than 10 years of experience on their forces. Table 10 shows that about 25 percent (148) of the 599 police officers who voluntarily separated from their forces in fiscal year 2002 took other federal law enforcement positions. Officers with fewer than 5 years of experience on their forces accounted for about 79 percent (117) of the separations to other federal law enforcement positions, and officers with 5 years to less than 10 years of experience accounted for an additional 16 percent (23). Table 11 shows that of the 13 police forces surveyed, 11 reported problems ranging in severity from a little or some extent, to a very great extent, with retaining officers in the Washington MSA. Of these 11 police forces, 4 characterized their agencies retention difficulties as a very great extent. Two police forces, the Government Printing Office Police and the Library of Congress Police, reported no difficulty with retention. Police forces reporting difficulties indicated a number of commonalities in terms of why officers had left the forces. Among the reasons given were better pay at other agencies; better benefits, including law enforcement retirement, at other agencies; better morale at other agencies; more challenging work at other agencies; promotional opportunities at other agencies; too much overtime at their police forces; and retirements from their police forces. Library of Congress Police officials attributed their low turnover rate to pay, working conditions, and the fact that the force does not have any age restrictions, which allows the force to hire older, more experienced officers. Each of the forces with retention difficulties reported steps taken to address the problem, including providing retention allowances, improving training, and improving working conditions. Additionally, officials from several police forces reported that they were considering providing increases in retention allowances and student loan repayments to address their retention difficulties. Only two police forces, the Pentagon Force Protection Agency and the Supreme Court Police, reported that the measures they had taken had solved the retention problem to a great extent; the remaining police forces indicated either that the measures taken had had a little or no effect or that it was too early to determine whether the measures taken would solve the retention problem. Table 12 illustrates the use of human capital flexibilities by the 13 police forces included in our review. While agency officials reported that a variety of human capital flexibilities were available across the agencies, there was variation among agencies both in terms of the specific flexibilities available and in the frequency of use. For instance, only 3 of the 13 agencies reported the availability of recruitment bonuses, and none were given in fiscal year 2002. Ten of the 13 reported the availability of performance-based cash awards, and 9 of these agencies made these awards in amounts averaging $109-$2,500. In addition to the persons named above, Leo M. Barbour, Susan L. Conlon, Evan Gilman, Kimberley Granger, Geoffrey Hamilton, Laura Luo, Michael O' Donnell, Doris Page, George Scott, Lou V.B. Smith, Edward H. Stephenson, Jr., Maria D. Strudwick, Mark Tremba, and Gregory H. Wilmoth made key contributions to this report.

Officials at several federal uniformed police forces in the Washington, D.C., metropolitan area have raised concerns that disparities in pay and retirement benefits have caused their police forces to experience difficulties in recruiting and retaining officers. These concerns have increased during the past year with the significant expansion of the Federal Air Marshal Program, which has created numerous relatively high-paying job opportunities for existing federal uniformed police officers and reportedly has lured many experienced officers from their uniformed police forces. GAO's objectives were to (1) determine the differences that exist among selected federal uniformed police forces regarding entry-level pay, retirement benefits, and types of duties; (2) provide information on the differences in turnover rates among these federal uniformed police forces, including where officers who separated from the police forces went and the extent to which human capital flexibilities were available and used to address turnover; and (3) provide information on possible difficulties police forces may have faced recruiting officers and the extent to which human capital flexibilities were available to help these forces recruit officers. During fiscal year 2002, entry-level police officer salaries varied by more than $10,000 across the 13 police forces, from a high of $39,427 per year to a low of $28,801 per year. Four of the 13 police forces received federal law enforcement retirement benefits. Between October 1, 2002, and April 1, 2003, 12 of the 13 police forces received pay increases, which narrowed the pay gap for entry-level officers at some of the 13 forces. Officials at the 13 police forces reported that while officers performed many of the same types of duties, the extent to which they performed specialized functions varied. Total turnover at the 13 police forces nearly doubled (from 375 to 729) between fiscal years 2001 and 2002. Additionally, during fiscal year 2002, 8 of the 13 police forces experienced their highest annual turnover rates over the 6-year period, from fiscal years 1997 through 2002. Sizable differences existed in the turnover rates among the 13 federal uniformed police forces during fiscal year 2002. The availability and use of human capital flexibilities to retain employees, such as retention allowances, varied. GAO found that the increase in the number of separations (354) across the 13 police forces between fiscal years 2001 and 2002 almost equaled the number of officers (316) who left their forces to join the Transportation Security Administration (TSA). Given that the buildup in staffing for TSA's Federal Air Marshal Program has been substantially completed, the increase in turnover experienced in fiscal year 2002 at 12 of the 13 police forces may have been a one-time occurrence. Officials at 9 of 13 police forces reported at least some difficulty recruiting officers. However, none of the police forces used important human capital flexibilities, such as recruitment bonuses and student loan repayments, during fiscal year 2002.

Charter schools are public schools that operate under a state charter (or contract) specifying the terms under which the schools may operate. They are established under state law, do not charge tuition, and are nonsectarian. State charter school laws and policies vary widely with respect to the degree of autonomy provided to the schools, the number of charter schools that may be established, the qualifications required for charter school applicants and teachers, and the accountability criteria that charter schools must meet. Since 1991, 29 states and the District of Columbia have enacted laws authorizing charter schools. In school year 1996-97, over 100,000 students were enrolled in nearly 500 charter schools in sixteen states and the District of Columbia. Most charter schools are newly created. According to the Department of Education, of the charter schools operating as of January 1996, about 56 percent were newly created, while about 33 percent were converted from preexisting public schools and about 11 percent were converted from preexisting private schools. Appendix II shows the states that have enacted charter laws, and the number of charter schools in operation during the 1996-97 school year, by state. Both the Congress and the administration have shown support for charter schools. For example, in amending the Elementary and Secondary Education Act in 1994, the Congress established a grant program to support the design and implementation of charter schools. In addition, under the Goals 2000: Educate America Act, states are allowed to use federal funds to promote charter schools. The administration proposed doubling the roughly $50 million made available under the new charter school grant program in fiscal year 1997 to $100 million for fiscal year 1998. Finally, in his 1997 State of the Union Address, the President called for the establishment of 3,000 charter schools nationwide by the next century. focused on the recent development of charter schools in various states. Concerns were raised during the hearings by charter school operators and others about whether charter schools were receiving equitable allocations of federal categorical grant funds. Recent research conducted by the Department of Education and by the Hudson Institute, a private, not-for-profit public policy research organization, raised similar concerns. Although dozens of financial aid programs exist for public elementary and secondary schools, two programs--title I and IDEA--are by far the largest federal programs. Title I is the largest federal elementary and secondary education aid program. The Department of Education administers title I, which received over $7 billion in federal funding in fiscal year 1997. Under the program, grants are provided to school districts--or local education agencies (LEA), as defined in federal statute and regulations--to assist them in educating disadvantaged children--those with low academic achievement attending schools serving relatively low-income areas. The program is designed to provide increasing levels of assistance to schools that have higher numbers of poor children. Nationwide, the Department of Education makes available to LEAs an annual average of about $800 for each child counted in the title I allocation formula. Under title I, the federal government awards grants to LEAs through state education agencies (SEA). SEAs are responsible for administering the grants and distributing the funds to LEAs. About 90 percent of the funds the Congress appropriates is distributed in the form of basic grants, while about 10 percent is distributed as concentration grants, which are awarded to LEAs serving relatively higher numbers of children from low-income families. Roughly 90 percent of LEAs nationwide receive basic grants. 2 percent of their school-aged population. To be eligible for concentration grants, LEAs generally must have enrolled more than 6,500 children from low-income families, or more than 15 percent of their students must be from low-income families. An LEA that receives title I funds and has more than one school within its district has some discretion in allocating these funds to individual schools. The LEA must rank its schools according to the proportion of children that come from low-income families enrolled in each school. LEAs must use the same measure of poverty in ranking all their schools, but LEAs have some discretion in choosing a particular measure. LEAs must allocate title I funds or provide title I services first to schools that have more than 75 percent of their students coming from low-income families. After providing funds or services to these schools, LEAs have the option of serving schools that do not meet the 75-percent criterion with remaining funds. Although a LEA is not required to allocate the same per-child amount to each school in its district, it may not allocate a higher amount per child to schools with lower poverty rates than to schools with higher poverty rates. IDEA, part B, is a federal grant program administered by the Department of Education that is designed to assist states in paying the costs of providing an education to children aged 3 to 21 with disabilities. The act requires, among other things, states to provide a free appropriate public education to all children with disabilities and requires that they be served in the least restrictive environment possible. The Congress appropriated $3.5 billion for the program in fiscal year 1997. These funds were expected to provide, on average, about $625 of services for each of 577,000 eligible preschool children, and $536 of services for each of 5.8 million eligible elementary and secondary school students. during the preceding fiscal year, the national average per-pupil expenditure, and the amount appropriated by the Congress for the program. The per-disabled-pupil amount that can be allocated for IDEA services is capped at 40 percent of the national average per-pupil expenditure. States use their own formulas to allocate funds. States must provide at least 75 percent of the IDEA funds they receive to eligible LEAs or other public authorities, and they may reserve the rest for statewide programs. Before the 1997 IDEA reauthorization, an LEA entitled to an allotment of less than $7,500 could not receive funding directly, according to federal statutory provisions. Instead, the LEA had to either rely on the state for services or join with other LEAs to collectively meet the $7,500 threshold and receive funds to serve eligible students. In reauthorizing IDEA, the Congress removed the $7,500 threshold. As a result, LEAs, including charter schools that are treated as LEAs, are no longer required to join with other LEAs in order to meet that threshold. Each state has different procedures for allocating special education aid to LEAs. Some states use census information to allocate a fixed amount per eligible student. Other states allocate funds on the basis of reimbursement rates for allowable expenses. Still other states allocate funding to LEAs on the basis of the severity and types of students' disabilities. States use several arrangements to provide funds to charter schools. In general, states allocate title I funds, and IDEA funds or services, to charter schools using one of three approaches. The seven states in our review used all three. allocate title I funds and IDEA funds or services to charter schools' parent LEAs. Charter schools, along with other public schools in the district, then receive their share of funds or services from their parent LEAs. The third approach for allocating funds to charter schools involves a mixture of the first and second approaches. In general, a charter school in a state using this approach receives federal funds directly from the SEA--and thus is treated as an LEA--if the school was chartered by a state agency, or through a parent LEA, if the school was chartered by a district or substate agency. States using this model include Arizona, Michigan, and Texas. Regardless of which of the three approaches states use, individual charter schools are generally allocated funds on the basis of whether they are treated as (1) an independent LEA, or school district (independent model), or as (2) a dependent of an LEA--that is, as a public school component of a preexisting school district (dependent model). Throughout my testimony, I refer to these two methods in allocating funds to charter schools as the (1) independent model and the (2) dependent model, respectively. Under title I and IDEA, the Department of Education is responsible for allocating funds to SEAs, which are required to allocate funds to LEAs. LEAs, in turn, may allocate funds to individual schools in their districts. While charter schools operating under the independent model are considered LEAs, charter schools operating under the dependent model are not. Because LEAs are allowed some discretion in allocating funds to individual schools within their districts, whether a charter school is treated as an LEA or as a dependent of an LEA is important. Under the title I program, SEAs distribute funds directly to eligible LEAs. To be eligible for funds, LEAs--including charter schools operating under the independent model--must meet the minimum statutory eligibility criteria of having enrolled at least 10 children from low-income families and having their low-income children constitute more than 2 percent of their school-aged population. No further distribution of funds needs to occur when an LEA has only one school, as is the case when an individual charter school is treated as an LEA under the independent model. LEAs that have more than one school--including charter schools operating under the dependent model--are responsible for allocating title I funds among their several schools. The federal statute and regulations lay out a complex set of criteria and conditions that LEAs use in deciding how to allocate funds to their schools. The intent of the statute is to shift title I funds received by LEAs to individual schools with relatively higher numbers and percentages of students from low-income families. Individual schools--including charter schools--within a multiple-school LEA, therefore, must potentially meet higher eligibility thresholds than they would if they were each considered an independent LEA. As a result, some charter schools that would have received title I funds under the independent model may not receive such funds because they are components of LEAs. Under the IDEA program, states have greater latitude than under title I to develop systems of their own to distribute program funds or special education services to schools and school districts. Given this latitude, the manner in which charter and other public schools receive these funds varies by state. For example, Arizona is currently in the process of allocating IDEA funds to charter schools on a pro-rata (per-eligible-student) basis. In Minnesota, the state reimburses charter schools for IDEA-eligible expenses. Yet another state--California--allocates its share of funds to so-called "special education local plan areas." Special education local plan areas are typically composed of adjacent school districts that jointly coordinate special education programs and finances in that state. Schools within these areas generally receive special education services, rather than grant funds. Overall, slightly more than two-fifths of the charter schools we surveyed received title I funds. Survey results indicated that slightly less than one-half of charter schools operating under the independent model, and one-half of the schools operating under the dependent model, received title I funds for the 1996-97 school year. Table 1 shows the number of charter schools surveyed that received title I funds, by funding model. About one-third of the charter schools we surveyed did not apply for title I funds. Charter school officials who did not apply cited reasons such as they (1) did not have time to do so, (2) knew they were ineligible for funds and therefore did not apply, or (3) found that applying for these funds would cost more than they would receive. Of those that applied for title I funds, two-thirds, or 14 of 21, reported receiving them. Title I funding for these schools ranged from $96 to $941 per eligible student; the average was $499 per eligible student, and the median was $435. The difference in per-student funding is related to the allocation formulas, which take into account the number and proportion of low-income children in the school, district, and county. Title I funds received by these schools represented between 0.5 percent and 10 percent of their total operating budgets. For all but three schools, funds received represented 5 percent or less of the schools' total operating budgets. With regard to the IDEA program, one-half of our survey respondents received funds or IDEA-funded services. Of all charter schools surveyed, two-fifths of the schools operating under the independent model received funds or IDEA-funded services, while two-thirds of those operating under the dependent model received funds or services. Table 2 shows the number of charter schools surveyed that received IDEA funds or IDEA-funded services, by funding model. funds received by schools represented between 0.08 percent and 2.5 percent of their total operating budgets. Regardless of funding model, more than two-thirds of charter school operators expressing an opinion believed that they received an equitable share of both title I and IDEA funding. About one-fourth of the charter school operators we surveyed told us that they had no basis on which to form an opinion or did not answer the question. (See tables 3 and 4). With regard to IDEA funding or IDEA-funded services, however, as many survey respondents under the independent funding model believed that they received an equitable share as believed that they did not receive an equitable share. For charter schools under the dependent model, on the other hand, almost five times as many survey respondents believed that their schools received an equitable share as believed that they did not receive an equitable share. (See table 4.) understanding of the allocation formulas and did not know if funds were equitably allocated. One official told us that she believed her school did not receive an equitable share of funds because the school's parent district used its discretion in allocating higher funding levels to another school in the district. Another official told us he believed funding formulas were biased towards larger schools and school districts, which had the effect of reducing the amount of funds available for smaller schools like his. Yet another charter school operator told us that he believed title I funds were not equitably allocated because funds are not distributed on a per-capita, or per-eligible-student, basis. On the basis of our preliminary work, charter schools do not appear to be at a disadvantage in terms of how federal funds are allocated. However, our survey has identified a variety of barriers that made it difficult for charter school operators to apply for and receive title I and IDEA funds. For example, three officials told us that because they had no prior year's enrollment or student eligibility data, they were not eligible under state guidelines for federal funds. In its July 1997 report, the Hudson Institute also found that title I funds were typically allotted on the basis of the previous year's population of title I-eligible children, "leaving start-up charters completely stranded for their first year." Two of our three respondents for whom lack of prior year's enrollment data was a problem were newly created schools, while the third was converted from a formerly private institution. Start-up eligibility issues are not always limited to a school's first year of operations. Some officials noted that their schools are incrementally increasing the number of grades served as the original student body progresses. For example, one school official told us that while the school currently serves grades 9 and 10, the school will eventually serve grades 9 through 12. about 40 newly enrolled students. But because of the time lag in reporting data, the school will have to wait until the following year for the additional funds. Over time, as enrollment stabilizes, these issues will pose fewer problems for school officials. Charter schools that were converted from traditional public schools generally do not have this problem when current enrollment is at or near full capacity and title I eligibility has previously been established. Moreover, some school officials reported difficulty obtaining the student eligibility data required to receive title I funds. In some states, school officials themselves must collect data on students' family incomes in order to establish eligibility for federal funds. Some officials told us that because of privacy concerns, some families are reluctant to return surveys sent home with students that ask for the income levels of students' households. An official told us that he believed parents may not understand that such data are used to qualify children for free and reduced-price lunches for schools that operate such programs, as well as for establishing the schools' eligibility for federal grant funds. In other cases, charter school officials must take additional steps to establish their eligibility for title I funds over and above those faced by their traditional public school counterparts. For example, in one state, charter school officials must manually match their student enrollment records against state and local Aid to Families With Dependent Children records to verify student eligibility. The business administrator for a charter school with an enrollment of about 1,000 students told us that it takes him and another staff person approximately 2 full days to complete this process. He said that while this procedure is accomplished electronically for traditional public schools, city officials told him that he had no such option. Another charter school official told us that timing issues prevented her from being able to access federal funds. For example, she said that her school's charter was approved after the deadline had passed for the state allocation of title I funds to public schools. The same school official said that her lack of awareness of what was required to obtain IDEA funds led her to underestimate the time required to prepare and submit applications, and she was thus unable to submit them on time. access these funds. For example, the business administrator at a charter school we visited told us that it took numerous visits and phone calls to district officials to understand the allocation processes and procedures, as well as to negotiate what he thought was an equitable share of federal funding for his school. District officials we spoke with noted that because their school district had approved and issued several charters to individual schools with varying degrees of fiscal autonomy, working out allocation issues has taken some time. District officials noted that they have limited time and resources to use in developing new policies and procedures for charter schools, especially because the number of charter schools and their student populations constitute a very small portion of their overall operations. In some cases, charter school officials noted that they did not receive funds because they failed to meet federal or district qualifying requirements. For example, current federal requirements mandate that LEAs--charter schools operating under the independent model--have at least 10 children from low-income families enrolled and that such children constitute more than 2 percent of their school-aged population. Of 32 schools responding to our survey, 9 had fewer than 10 students who were eligible for title I funds. Schools operating under the dependent funding model may face more barriers than do schools operating under the independent funding model because dependent-model schools must go through an intermediary--or school district--in accessing federal funds, rather than receiving funds directly from the state. One charter school operator told us that she believed that her school's parent LEA unfairly used its discretion in allocating funds to schools within its district. She said that other schools in the district received higher funding levels than did her school. Even though state officials told her that it was within the LEA's discretion to allocate funds the way it did, she believes that district officials were singling her school out for disparate treatment because it is a charter school. Another charter school operator told us that uncooperative district officials were an obstacle in accessing federal funds because they were unwilling to provide assistance in obtaining funding for her school. $7,500 threshold and collectively file a joint application. Given recent federal IDEA appropriations, a school district, or group of districts, is required, in effect, to have enrolled approximately 20 to 25 eligible students to meet the $7,500 threshold. Of the charter schools responding to our survey, 17 enrolled 20 or fewer IDEA-eligible students. Two survey respondents told us that the requirement for schools to join consortiums to access IDEA funds discouraged or prevented them from pursuing these funds. Moreover, some charter school officials have philosophical differences with IDEA requirements and forego IDEA funding because it does not accommodate their educational methods, according to a charter school technical assistance provider we visited. She said that IDEA requires schools to develop written individualized education programs (IEP) for disabled children, and requires schools to follow specified processes in developing these IEPs. In order to receive IDEA funds, schools must have prepared these IEPs for disabled students. In contrast to preparing IEPs for disabled children only, she said some charter schools approach to education includes considering that all children have special needs. Accordingly, they develop a unique education plan for each child, stressing individualized instruction. The Hudson Institute, in conducting its study, visited charter schools and spoke with school officials and parents who said they preferred that their children not be "labeled" and did not want their educational needs met in "cumbersome, standardized ways." order to receive IDEA funding until the state informed her of the requirement. Another official told us that although she had contacted a local school district that was willing to jointly file an application with her school, a lack of time to prepare the application and the small amount of funds to which her school would be entitled led her to decide not to pursue the funds. In our discussions with them, several charter school officials emphasized that they had very little time and resources available to devote to accessing title I and IDEA funds. These officials often played multiple roles at their schools, including principal, office manager, nurse, and janitor. One operator told us that it would not be stretching the truth much to say that if all he was required to do was to sign on a dotted line, stuff an envelope, and lick a stamp, he would not have time. Another operator told us that if she receives anything in the mail with the words "title I" on it, she throws it away because she has so little time to attend to such matters. This operator also added that she found the costs of accessing federal funds excessive since she would be restricted in terms of how she could use these funds. She said that it was more reasonable for her to determine how such funds should be spent than for federal and state regulations to dictate these decisions. Charter school operators reported that outreach and technical assistance were key factors that facilitated their ability to access federal funds. Other factors cited by school officials included the use of consolidated program applications, the use of computerized application forms and processes, and the ability to rely on sponsoring district offices for grants administration. Charter school officials most frequently cited receiving information about the availability of federal funds and how much their schools would be eligible for as facilitating factors in accessing title I and IDEA monies. Officials cited a number of sources from which they had obtained such information, including their own states' departments of education and local school district officials. In addition, charter school officials credited training and technical assistance provided by these sources with helping them to access federal funds. On the basis of our conversations with school officials, it appears that some states are doing more than others to provide assistance to charter schools. In particular, survey respondents in Arizona reported nearly unanimous praise for the amount and availability of assistance provided by the state department of education. They noted that the state has actively informed them of funding opportunities and offered them technical assistance on many occasions. A respondent in another state cited the use of consolidated applications as a facilitating factor in accessing funds. Under the title I program, SEAs may allow LEAs to submit one application for several federally funded programs. Another respondent told us that her SEA's use of the Internet, over which she could obtain and submit her school's title I application, facilitated her access to these funds. Still another respondent told us that being able to rely on his charter school's parent LEA for federal grants administration relieved him of the burden of administering the grant and thus facilitated his access to federal funds. Finally, some respondents told us that their schools employed consultants to assist in applying for federal and state funds, which enabled them to focus their time and effort on other matters. In conclusion, our preliminary work suggests that the barriers that charter schools face in accessing federal funds appear to be unrelated to whether charter schools are treated as school districts or as members of school districts. Rather, other barriers, many of which are not related to the path federal funds take, have had a more significant effect on charter schools' ability to access title I and IDEA funds. These other barriers include state systems that base funding allocations on the prior year's enrollment and student eligibility data, the costs of accessing funds relative to the amounts that schools would receive, and the significant time constraints that prevent charter school operators from pursuing funds. Despite these barriers, most charter school operators who expressed an opinion believe that title I and IDEA funds are equitably allocated to charter schools. This concludes my statement, Mr. Chairman. I would be happy to answer any questions you or Members of the Subcommittee may have. Schools that refused to participate Charter schools are also located in Alaska, Delaware, the District of Columbia, Florida, Georgia, Hawaii, Illinois, Louisiana, New Mexico, and Wisconsin. Not applicable. States with charter legislation but no charter schools. States included in our survey with number of schools operating in each. States and the District of Columbia not included in our survey. 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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GAO discussed charter schools' ability to access categorical education grant funds, focusing on: (1) how federal title I of the Elementary and Secondary Education Act and the Individuals With Disabilities Education (IDEA) funds are distributed to charter schools, and the opinions of charter school operators on whether the distribution is equitable; and (2) what factors appear to be facilitating and impeding charter schools in accessing these funds. GAO noted that: (1) title I and IDEA funds are allocated to schools that meet established federal, state, and local demographic criteria; (2) these criteria relate to the number of enrolled children from low-income families and the number of enrolled children with disabilities that require special education services; (3) although most public schools receive funding under these programs, some public schools, including some charter schools, do not meet eligibility criteria and, as a result, do not receive funding; (4) GAO's preliminary work suggests that states are allocating federal funds to charter schools in much the same manner as they allocate funds to traditional public schools; (5) in general, states either treat charter schools as individual school districts or as components of existing districts; (6) although charter schools treated as school districts avoid having to meet additional criteria used to distribute funds beyond the district level, GAO's survey results thus far indicate that these schools were no more likely to have received title I and IDEA funds for the 1996-97 school year than were charter schools treated as components of existing school districts; (7) most charter school operators surveyed who expressed an opinion told GAO that they believe they received an equitable share of federal title I and IDEA funds; (8) while charter schools do not appear to be at a disadvantage in terms of how federal funds are allocated, GAO's survey has revealed a variety of barriers that have made it difficult for charter schools to access title I and IDEA funds; (9) these factors include a lack of enrollment and student eligibility data to submit to states before funding allocation decisions are made and the time required and the costs involved in applying for such funds, given the amount of funds available; (10) in addition, some charter schools have failed to meet statutory eligibility requirements for receiving federal funds; (11) charter school operators most often cited training and technical assistance as factors that facilitated their accessing title I and IDEA funds; (12) on the basis of survey responses, some states appear to be making a comprehensive effort to inform charter schools of the availability of federal funds and how to apply for them; and (13) charter school operators in other states told GAO that they received technical assistance from local school districts, while other charter school operators employed consultants to assist them.

FEMA has developed a policy and procedures regarding misconduct investigations that apply to all FEMA personnel and has also documented policies and procedures regarding options to address misconduct and appeal rights for Title 5 and CORE employees. However, FEMA has not documented complete misconduct policies and procedures for Surge Capacity Force members or Reservists. DHS issued the Surge Capacity Force Concept of Operations in 2010, which outlines FEMA's base implementation plan for the Surge Capacity Force. However, the document does not address any elements pertaining to Surge Capacity Force human capital management, specifically misconduct and disciplinary policies and procedures. According to the FEMA Surge Capacity Force Coordinator, despite the lack of documentation, any incidents of misconduct would likely be investigated by FEMA's OCSO, which would then refer the completed report of investigation to the employee's home component for adjudication and potential disciplinary action. However, although no allegations of misconduct were made at the time, the Federal Coordinating Officer in charge of one of the Hurricane Sandy Joint Field Offices said he had not seen anything in writing or any formal guidance that documents or explains how the process would work and stated that he would have had to contact FEMA headquarters for assistance in determining how to address any misconduct. Without documented guidance, FEMA cannot ensure that Surge Capacity Force misconduct is addressed adequately in a timely and comprehensive manner. Therefore, in our July 2017 report we recommended that the FEMA Administrator document policies and procedures to address potential Surge Capacity Force misconduct. DHS concurred and stated that FEMA is developing a Human Capital plan for the Surge Capacity Force and will include policies and procedures relating to potential misconduct. DHS estimated that this effort would be completed by June 30, 2018. This action, if fully implemented, should address the intent of the recommendation. Additionally, we found that FEMA's Reservist Program Manual lacks documented policies and procedures on disciplinary options to address misconduct and appeal rights for Reservists. Both LER and PLB officials told us that, in practice, disciplinary actions for Reservists are limited to reprimands and termination. According to these officials, FEMA does not suspend Reservists because they are an intermittent, at-will workforce deployed as needed to respond to disasters. Federal Coordinating Officers and cadre managers have the authority to demobilize Reservists and remove them from a Joint Field Office if misconduct occurs, which may be done in lieu of suspension. Furthermore, LER and PLB officials also told us that, in practice, FEMA grants Reservists the right to appeal a reprimand or termination to their second-level supervisor. However, these actions are not documented in the Reservist Program Manual. Without documented Reservist disciplinary options and appeals policies, supervisors and Reservist employees may not be aware of all aspects of the disciplinary and appeals process. Thus, in our July 2017 report, we recommended that FEMA document Reservist disciplinary options and appeals that are currently in practice at the agency. DHS concurred and stated that FEMA will update its Reservist program directive to include procedures for disciplinary actions and appeals currently in practice at the agency. DHS estimated that this effort would be completed by December 31, 2017. This action, if fully implemented, should address the intent of the recommendation. We also reported in our July 2017 report that FEMA does not communicate the range of offenses and penalties to its entire workforce. Namely, FEMA revised its employee disciplinary manual for Title 5 employees in 2015, and in doing so, eliminated the agency's table of offenses and penalties. Tables of offenses and penalties are used by agencies to provide guidance on the range of penalties available when formal discipline is taken. They also provide awareness and inform employees of the penalties which may be imposed for misconduct. Since revising the manual and removing the table, FEMA no longer communicates possible punishable offenses to its entire workforce. Instead, information is now communicated to supervisors and employees on an individual basis. Specifically, LER specialists currently use a "comparators" spreadsheet with historical data on previous misconduct cases to determine a range of disciplinary or adverse actions for each specific misconduct case. The information used to determine the range of penalties is shared with the supervisor on a case-by-case basis; however, LER specialists noted that due to privacy protections they are the only FEMA officials who have access to the comparators spreadsheet. Because information about offenses and penalties is not universally shared with supervisors and employees, FEMA management is limited in its ability to set expectations about appropriate conduct in the workplace and to communicate consequences of inappropriate conduct. We recommended that FEMA communicate the range of penalties for specific misconduct offenses to all employees and supervisors. DHS concurred and stated that FEMA is currently drafting a table of offenses and penalties and will take steps to communicate those penalties to employees throughout the agency once the table is finalized. DHS estimated that this effort would be completed by December 31, 2017. This action, if fully implemented, should address the intent of the recommendation. The three offices on the AID Committee involved in investigating and adjudicating employee misconduct complaints each maintain separate case tracking spreadsheets with data on employee misconduct to facilitate their respective roles in the misconduct review process. We analyzed data provided by OCSO in its case tracking spreadsheet and found that there were 595 complaints from January 2014 through September 30, 2016. The complaints involved alleged offenses of employee misconduct which may or may not have been substantiated over the course of an investigation. Based on our analysis, the 595 complaints contained approximately 799 alleged offenses from January 2014 through September 30, 2016. As shown in figure 1 below, the most common type of alleged offenses were integrity and ethics violations (278), inappropriate comments and conduct (140), and misuse of government property or funds (119). For example, one complaint categorized as integrity and ethics involved allegations that a FEMA employee at a Joint Field Office was accepting illegal gifts from a FEMA contractor and a state contractor. Another complaint categorized as inappropriate comments and conduct involved allegations that a FEMA employee's supervisor and other employees had bullied and cursed at them, creating an unhealthy work environment. Finally, a complaint categorized as misuse of government property or funds involved allegations that a former FEMA employee was terminated but did not return a FEMA-owned laptop. OCSO, LER, and PLB collect data on employee misconduct and outcomes, but limited standardization of fields and entries within fields, limited use of unique case identifiers, and a lack of documented guidance on data entry restricts their usefulness for identifying and addressing trends in employee misconduct. FEMA employee misconduct data are not readily accessible and cannot be verified as accurate and complete on a timely basis. These limitations restrict management's ability to process the data into quality information that can be used to identify and address trends in employee misconduct. For example, an OCSO official stated that senior OCSO officials recently requested employee misconduct information based on employee type, such as the number of Reservists. However, the data are largely captured in narrative fields, making it difficult to extract without manual review. In our July 2017 report we recommended that FEMA improve the quality and usefulness of the misconduct data it collects by implementing quality control measures, such as adding additional drop-down fields with standardized entries, adding unique case identifier fields, developing documented guidance for data entry, or considering the adoption of database software. In addition, we recommended that FEMA conduct routine reporting on employee misconduct trends once the quality of the data is improved. DHS concurred and stated that FEMA is working with the DHS OIG to develop a new case management system. The system will use drop-down fields with standardized entries and provide tools for trend analysis. Once the new system is implemented, DHS stated that FEMA will be able to routinely identify and address emerging trends of misconduct. DHS estimated that these efforts would be completed by March 31, 2018. These actions, if fully implemented, should address the intent of the recommendations. Officials from OCSO, LER, and PLB conduct weekly AID Committee meetings to coordinate information on misconduct allegations and investigations. The committee reviews allegations, refers cases for investigation or inquiry, and discusses the status of investigations. In addition to the weekly AID Committee meetings, LER and PLB officials stated that they meet on a regular basis to discuss disciplinary and adverse actions and ensure that any penalties are consistent and defensible in court. Employee misconduct information is also shared directly with FEMA's Chief Security Officer and Chief Counsel. Within FEMA, these regular meetings and status reports provide officials from key personnel management offices opportunities to communicate and share information about employee misconduct. FEMA also provides DHS OIG with information on employee misconduct cases on a regular basis through monthly reports on open investigations. We found that OCSO has not established effective procedures to ensure that all cases referred to FEMA by DHS OIG are accounted for and subsequently reviewed and addressed. As discussed earlier, OCSO sends a monthly report of open investigations to DHS OIG. However, while these reports provide awareness of specific investigations, according to OCSO officials, neither office reconciles the reports to a list of referred cases to ensure that all cases are addressed. We reviewed a non-generalizable random sample of 20 fiscal year 2016 employee misconduct complaints DHS OIG referred to FEMA for review and found that FEMA missed 6 of the 20 complaints during the referral process and had not reviewed them at the time of our inquiry. As a result of our review, FEMA subsequently took action to review the complaints. The AID Committee recommended that OCSO open inquiries in 3 of the 6 cases to determine whether the allegations were against FEMA employees, assigned 2 cases to LER for further review, and closed 1 case for lack of information. According to an OCSO official, OCSO subsequently determined that none of the allegations in the 3 cases they opened involved FEMA employees and the cases were closed. The remaining 2 cases were open as of April 2017. The results from our sample cannot be generalized to the entire population of referrals from DHS OIG to FEMA; however, they raise questions as to whether there could be additional instances of misconduct complaints that FEMA has not reviewed or addressed. Therefore, in our July 2017 report we recommended that FEMA develop reconciliation procedures to consistently track referred cases. DHS concurred and stated that once the new case management system described above is established and fully operational, FEMA will be able to upload all DHS OIG referrals into a single, agency-wide database. Additionally, FEMA will work with DHS OIG to establish processes and procedures that will improve reconciliation of case data. DHS estimated that these efforts would be completed by March 31, 2018. These actions, if fully implemented, should address the intent of the recommendation. Chairman Perry, Ranking Member Correa, Members of the Subcommittee, this concludes my prepared testimony. I would be pleased to answer any questions that you may have at this time. If you or your staff members have any questions concerning this testimony, please contact me at 404-679-1875 or [email protected]. Contact points for our Offices of Congressional Relations and Public Affairs may be found on the last page of this statement. Other individuals who made key contributions to this testimony include Sarah Turpin, Kristiana Moore, Steven Komadina, and Ben Atwater. 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 summarizes the information contained in GAO's July 2017 report, entitled Federal Emergency Management Agency: Additional Actions Needed to Improve Handling of Employee Misconduct Allegations ( GAO-17-613 ). The Federal Emergency Management Agency (FEMA) has developed and documented misconduct policies and procedures for most employees, but not its entire workforce. Specifically, FEMA has developed policies and procedures regarding misconduct investigations that apply to all FEMA personnel and has also documented options to address misconduct and appeal rights for Title 5 (generally permanent employees) and Cadre of On-Call Response/Recovery Employees (temporary employees who support disaster related activities). However, FEMA has not documented misconduct policies and procedures for Surge Capacity Force members, who may augment FEMA's workforce in the event of a catastrophic disaster. Additionally, FEMA's Reservist (intermittent disaster employees) policies and procedures do not outline disciplinary actions or the appeals process currently in practice at the agency. As a result, supervisors and Reservist employees may not be aware of all aspects of the process. Clearly documented policies and procedures for all workforce categories could help to better prepare management to address misconduct and mitigate perceptions that misconduct is handled inconsistently. FEMA records data on misconduct cases and their outcomes; however, aspects of this data limit their usefulness for identifying and addressing trends. GAO reviewed misconduct complaints recorded by FEMA's Office of the Chief Security Officer (OCSO) from January 2014 through September 30, 2016, and identified 595 complaints involving 799 alleged offenses, the most common of which were integrity and ethics violations. FEMA reported 546 disciplinary actions related to misconduct from calendar year 2014 through 2016. In addition to OCSO, two other FEMA offices involved in investigating and adjudicating misconduct also record data. However, limited standardization of data fields and entries within fields, limited use of unique case identifiers, and a lack of documented guidance on data entry across all three offices restricts the data's usefulness for identifying and addressing trends in employee misconduct. Improved quality control measures could help the agency use the data to better identify potential problem areas and opportunities for training. FEMA shares misconduct case information internally and with the Department of Homeland Security Office of Inspector General (DHS OIG) on a regular basis; however, FEMA does not have reconciliation procedures in place to track DHS OIG referred cases to ensure that they are reviewed and addressed. GAO reviewed a random sample of 20 cases DHS OIG referred to FEMA in fiscal year 2016 and found that FEMA missed 6 of the 20 complaints during the referral process and had not reviewed them at the time of GAO's inquiry. As a result of GAO's review, FEMA took action to review the complaints and opened inquiries in 5 of the 6 cases (1 case was closed for lack of information). In 3 of these cases, officials determined that the complaints did not involve FEMA employees. The 2 remaining cases were open as of April 2017. While the results from this review are not generalizable to the entire population of referrals from DHS OIG to FEMA, they raise questions as to whether there could be additional instances of misconduct complaints that FEMA has not reviewed or addressed. Procedures to ensure reconciliation of referred cases across FEMA and DHS OIG records could help ensure that FEMA accounts for all complaints.

Through the impartial and independent investigation of citizens' complaints, federal ombudsmen help agencies be more responsive to the public, including people who believe that their concerns have not been dealt with fully or fairly through normal channels. Ombudsmen may recommend ways to resolve individual complaints or more systemic problems, and may help to informally resolve disagreements between the agency and the public. While there are no federal requirements or standards specific to the operation of federal ombudsman offices, the Administrative Conference of the United States recommended in 1990 that the President and the Congress support federal agency initiatives to create and fund an external ombudsman in agencies with significant interaction with the public. In addition, several professional organizations have published relevant standards of practice for ombudsmen. Both the recommendations of the Administrative Conference of the United States and the standards of practice adopted by various ombudsman associations incorporate the core principles of independence, impartiality (neutrality), and confidentiality. For example, the ABA's standards define these characteristics as follows: Independence--An ombudsman must be and appear to be free from interference in the legitimate performance of duties and independent from control, limitation, or penalty by an officer of the appointing entity or a person who may be the subject of a complaint or inquiry. Impartiality--An ombudsman must conduct inquiries and investigations in an impartial manner, free from initial bias and conflicts of interest. Confidentiality--An ombudsman must not disclose and must not be required to disclose any information provided in confidence, except to address an imminent risk of serious harm. Records pertaining to a complaint, inquiry, or investigation must be confidential and not subject to disclosure outside the ombudsman's office. Relevant professional standards contain a variety of criteria for assessing an ombudsman's independence, but in most instances, the underlying theme is that an ombudsman should have both actual and apparent independence from persons who may be the subject of a complaint or inquiry. According to ABA guidelines, for example, a key indicator of independence is whether anyone subject to the ombudsman's jurisdiction can (1) control or limit the ombudsman's performance of assigned duties, (2) eliminate the office, (3) remove the ombudsman for other than cause, or (4) reduce the office's budget or resources for retaliatory purposes. Other factors identified in the ABA guidelines on independence include a budget funded at a level sufficient to carry out the ombudsman's responsibilities; the ability to spend funds independent of any approving authority; and the power to appoint, supervise, and remove staff. The Ombudsman Association's standards of practice define independence as functioning independent of line management; they advocate that the ombudsman report to the highest authority in the organization. According to the ABA's recommended standards, "the ombudsman's structural independence is the foundation upon which the ombudsman's impartiality is built." One aspect of the core principle of impartiality is fairness. According to an article published by the U.S. Ombudsman Association on the essential characteristics of an ombudsman, an ombudsman should provide any agency or person being criticized an opportunity to (1) know the nature of the criticism before it is made public and (2) provide a written response that will be published in whole or in summary in the ombudsman's final report. In addition to the core principles, some associations also stress the need for accountability and a credible review process. Accountability is generally defined in terms of the publication of periodic reports that summarize the ombudsman's findings and activities. Having a credible review process generally entails having the authority and the means, such as access to agency officials and records, to conduct an effective investigation. The ABA recommends that an ombudsman issue and publish periodic reports summarizing the findings and activities of the office to ensure its accountability to the public. Similarly, recommendations by the Administrative Conference of the United States regarding federal ombudsmen state that they should be required to submit periodic reports summarizing their activities, recommendations, and the relevant agency's responses. Federal agencies face legal and practical constraints in implementing some aspects of these standards because the standards were not designed primarily with federal agency ombudsmen in mind. However, ombudsmen at the federal agencies we reviewed for our 2001 report reflected aspects of the standards. We examined the ombudsman function at four federal agencies in addition to EPA and found that three of them--the Federal Deposit Insurance Corporation, the Food and Drug Administration, and the Internal Revenue Service--had an independent office of the ombudsman that reported to the highest level in the agency, thus giving the ombudsmen structural independence. In addition, the ombudsmen at these three agencies had functional independence, including the authority to hire, supervise, discipline, and terminate their staff, consistent with the authority granted to other offices within their agencies. They also had control over their budget resources. The exception was the ombudsman at the Agency for Toxic Substances and Disease Registry, who did not have a separate office with staff or a separate budget. This ombudsman reported to the Assistant Administrator of the agency instead of the agency head. In our July 2001 report, we recommended, among other things, that EPA modify its organizational structure so that the function would be located outside of the Office of Solid Waste and Emergency Response, whose activities the national ombudsman was charged with reviewing. EPA addresses this recommendation through its placement of the national ombudsman within the OIG, where the national ombudsman will report to a newly-created position of Assistant Inspector General for Congressional and Public Liaison. OIG officials also told us that locating the national ombudsman function within the OIG offers the prospect of additional resources and enhanced investigative capability. According to the officials, the national ombudsman will likely have a small permanent staff but will also be able to access OIG staff members with expertise in specific subject matters, such as hazardous waste or water pollution, on an as-needed basis. Further, OIG officials anticipate that the ombudsman will adopt many of the office's existing recordkeeping and reporting practices, which could help address the concerns we noted in our report about accountability and fairness to the parties subject to an ombudsman investigation. Despite these aspects of EPA's reorganization, several issues merit further consideration. First and foremost is the question of intent in establishing an ombudsman function. The term "ombudsman," as defined within the ombudsman community, carries with it certain expectations. The role of an ombudsman typically includes program operating responsibilities, such as helping to informally resolve program-related issues and mediating disagreements between the agency and the public. Assigning these responsibilities to an office within the OIG would conflict with statutory restrictions on the Inspector General's activities. Specifically, the Inspector General Act, as amended, prohibits an agency from transferring any function, power, or duty involving program responsibilities to its OIG. However, if EPA omits these responsibilities from the position within the OIG, then it will not have established an "ombudsman" as the function is defined within the ombudsman community. In our April 2001 report, we noted that some federal experts in dispute resolution were concerned that among the growing number of federal ombudsman offices there are some individuals or activities described as "ombuds" or "ombuds offices" that do not generally conform to the standards of practice for ombudsmen. A related issue is that ombudsmen generally serve as a key focal point for interaction between the government, or a particular government agency, and the general public. By placing the national ombudsman function within its OIG, EPA appears to be altering the relationship between the function and the individuals that make inquiries or complaints. Ombudsmen typically see their role as being responsive to the public, without being an advocate. However, EPA's reorganization signals a subtle change in emphasis: OIG officials see the ombudsman function as a source of information regarding the types of issues that the OIG should be investigating. Similarly, rather than issue reports to complainants, OIG officials expect that the national ombudsman's reports will be addressed to the EPA Administrator, consistent with the reporting procedures for other OIG offices. The officials told us that their procedures for the national ombudsman function, which are still being developed, could provide for sending a copy of the final report or a summary of the investigation to the original complainant along with a separate cover letter when the report is issued to the Administrator. Based on the preliminary information available from EPA, the reorganization raises other issues regarding the consistency of the agency's ombudsman function with relevant professional standards. For example, under EPA's reorganization, the national ombudsman will not be able to exercise independent control over budget and staff resources, even within the general constraints that are faced by federal agencies. According to OIG officials, the national ombudsman will have input into the hiring, assignment, and supervision of staff, but overall authority for staff resources and the budget allocation rests with the Assistant Inspector General for Congressional and Public Liaison. OIG officials pointed out that the issue our July 2001 report raised about control over budget and staff resources was closely linked to the ombudsman's placement within the Office of Solid Waste and Emergency Response. The officials believe that once the national ombudsman function was relocated to the OIG, the inability to control resources became much less significant as an obstacle to operational independence. They maintain that although the ombudsman is not an independent entity within the OIG, the position is independent by virtue of the OIG's independence. Despite the OIG's argument, we note that the national ombudsman will also lack authority to independently select and prioritize cases that warrant investigation. According to EPA, the Inspector General has the overall responsibility for the work performed by the OIG, and no single staff member--including the ombudsman--has the authority to select and prioritize his or her own caseload independent of all other needs. Decisions on whether complaints warrant a more detailed review will be made by the Assistant Inspector General for Congressional and Public Liaison in consultation with the national ombudsman and staff. EPA officials are currently reviewing the case files obtained from the former ombudsman, in part to determine the anticipated workload and an appropriate allocation of resources. According to OIG officials, the national ombudsman will have access to other OIG resources as needed, but EPA has not yet defined how decisions will be made regarding the assignment of these resources. Under the ABA guidelines, one measure of independence is a budget funded at a level sufficient to carry out the ombudsman's responsibilities. However, if both the ombudsman's budget and workload are outside his or her control, then the ombudsman would be unable to assure that the resources for implementing the function are adequate. Ombudsmen at other federal agencies must live within a budget and are subject to the same spending constraints as other offices within their agencies, but they can set their own priorities and decide how their funds will be spent. EPA has also not yet fully defined the role of its regional ombudsmen or the nature of their relationship with the national ombudsman in the OIG. EPA officials told us that the relationship between the national and regional ombudsmen is a "work in progress" and that the OIG will be developing procedures for when and how interactions will occur. Depending on how EPA ultimately defines the role of its regional ombudsmen, their continued lack of independence could remain an issue. In our July 2001 report, we concluded that the other duties assigned to the regional ombudsmen--primarily line management positions within the Superfund program--hamper their independence. Among other things, we cited guidance from The Ombudsman Association, which states that an ombudsman should serve "no additional role within an organization" because holding another position would compromise the ombudsman's neutrality. According to our discussions with officials from the Office of Solid Waste and Emergency Response and the OIG, the investigative aspects of the ombudsman function will be assigned to the OIG, but it appears that the regional ombudsmen will respond to inquiries and have a role in informally resolving issues between the agency and the public before they escalate into complaints about how EPA operates. For the time being, EPA officials expect the regional ombudsmen to retain their line management positions. Finally, including the national ombudsman function within the Office of the Inspector General raises concerns about the effect on the OIG, even if EPA defines the ombudsman's role in a way that avoids conflict with the Inspector General Act. By having the ombudsman function as a part of the OIG, the Inspector General could no longer independently audit and investigate that function, as is the case at other federal agencies where the ombudsman function and the OIG are separate entities. As we noted in a June 2001 report on certain activities of the OIG at the Department of Housing and Urban Development, under applicable government auditing standards the OIG cannot independently and impartially audit and investigate activities it is directly involved in. A related issue concerns situations in which the national ombudsman receives an inquiry or complaint about a matter that has already been investigated by the OIG. For example, OIG reports are typically transmitted to the Administrator after a review by the Inspector General. A process that requires the Inspector General to review an ombudsman- prepared report that is critical of, or could be construed as reflecting negatively on, previous OIG work could pose a conflict for the Inspector General. OIG officials are currently working on detailed procedures for the national ombudsman function, including criteria for opening, prioritizing, and closing cases, and will have to address this issue as part of their effort. In conclusion, Mr. Chairman, we believe that several issues need to be considered in EPA's reorganization of its ombudsman function. The first is perhaps the most fundamental--that is, the need to clarify the intent. We look forward to working with members of the Committee as you consider the best way of resolving these issues.

The Environmental Protection Agency's (EPA) hazardous waste ombudsman was established as a result of the 1984 amendments to the Resource Conservation and Recovery Act. Recognizing that the ombudsman provides a valuable service to the public, EPA retained the ombudsman function as a matter of policy after its legislative authorization expired in 1988. Over time, EPA expanded the national ombudsman's jurisdiction to include Superfund and other hazardous waste programs, and, by March 1996, EPA had designated ombudsmen in each of its ten regional offices. In November 2001, the agency announced that the national ombudsman would be relocated from the Office of Solid Waste and Emergency Response to the Office of the Inspector General (OIG) and would address concerns across the spectrum of EPA programs, not just hazardous waste programs. Although there are no federal requirements or standards specific to the operation of ombudsman offices, several professional organizations have published standards of practice relevant to ombudsmen who deal with public inquiries. If EPA intends to have an ombudsman function consistent with the way the position is typically defined in the ombudsman community, placing the national ombudsman within the OIG does not achieve that objective. The role of the ombudsman typically includes program operating responsibilities, such as helping to informally resolve program-related issues and mediating disagreements between the agency and the public. Including these responsibilities within the OIG would likely conflict with the Inspector General Act, which prohibits the transfer of program operating responsibilities to the Inspector General; yet, omitting these responsibilities would result in establishing an ombudsman that is not fully consistent with the function as defined within the ombudsman community.

The national security space sector is primarily comprised of military and intelligence activities. The U.S. Strategic Command, one of the combatant commands, is responsible for establishing overall operational requirements for space activities, and the military services are responsible for satisfying these requirements to the maximum extent practicable. The Air Force is DOD's primary procurer and operator of space systems and spends the largest share of defense space funds. The Air Force Space Command is the major component providing space forces for the U.S. Strategic Command. The Army controls a defense satellite communications system and operates ground mobile terminals. The Army Space and Missile Defense Command conducts space operations and provides planning, integration, and control and coordination of Army forces and capabilities in support of the U.S. Strategic Command. The Navy operates several space systems that contribute to surveillance and warning and is responsible for acquiring the Mobile User Operations System, the next generation ultrahigh frequency satellite communication system. The Marine Corps uses space to provide the warfighter with intelligence, communications, and position navigation. The National Reconnaissance Office designs, procures, and operates space systems dedicated to national security activities and depends on personnel from each of the services' space cadres to execute its mission. Due to continuing concerns about DOD's management of space activities, in October 1999 Congress chartered a commission--known as the Space Commission--to assess the United States' national security space management and organization. In its January 2001 report, the Space Commission made recommendations to DOD to improve coordination, execution, and oversight of the department's space activities. One issue the Space Commission identified was the need to create and maintain a highly trained and experienced cadre of space professionals who could master highly complex technology, as well as develop new concepts of operations for offensive and defensive space operations. The Space Commission noted that the defense space program had benefited from world-class scientists, engineers, and operators, but many experienced personnel were retiring and the recruitment and retention of space- qualified personnel was a problem. Further, the commission concluded that DOD did not have a strong military space culture, which included focused career development and education and training. In October 2001, the Secretary of Defense issued a memorandum directing the military services to draft specific guidance and plans for developing, maintaining, and managing a cadre of space-qualified professionals. A DOD directive in June 2003 designated the Secretary of the Air Force as the DOD Executive Agent for Space, with the Executive Agent responsibilities delegated to the Under Secretary of the Air Force. The directive stated that the Executive Agent shall develop, coordinate, and integrate plans and programs for space systems and the acquisition of DOD major space programs to provide operational space force capabilities. Further, the directive required the Executive Agent to lead efforts to synchronize the services' space cadre activities and to integrate the services' space personnel into a cohesive joint force to the maximum extent practicable. The directive also makes the military services responsible for developing and maintaining a cadre of space-qualified professionals in sufficient quantities to represent the services' interests in space requirements, acquisition, and operations. We have identified strategic human capital management as a governmentwide high-risk area and provided tools intended to help federal agency leaders manage their people. Specifically, we identified a lack of a consistent strategic approach to marshal, manage, and maintain the human capital needed to maximize government performance and ensure its accountability. In our exposure draft on a model of strategic human capital management, we identified four cornerstones of human capital planning that have undermined agency effectiveness, which are leadership; strategic human capital planning; acquiring, developing, and retaining talent; and results-oriented organizational cultures. We also cited critical success factors for strategic human capital planning, including integration and data-driven human capital decisions. Furthermore, we reported that many federal agencies had not put in place a strategic human capital planning process for determining critical organizational capabilities, identifying gaps in these capabilities and resources needed, and designing evaluation methods. DOD's space human capital strategy, which we believe is a significant first step, promotes the development and integration of the military services' space cadres; however, DOD has not developed a plan to implement actions to achieve the strategy's goals and objectives. A strategy and a plan to implement the strategy are central principles of a results-oriented management framework. DOD's space human capital strategy establishes direction for the future, includes goals for integrating the services' space cadres and developing space-qualified personnel, and identifies approaches and objectives to meet the strategy's goals. An implementation plan for the strategy could include specific actions, responsibilities, time frames, and evaluation measures. DOD has begun to implement some of the key actions identified in the strategy. A results-oriented management framework provides an approach that DOD could use to develop and manage the services' space cadres, including a strategy and a plan to implement the strategy. Sound general management tenets, embraced by the Government Performance and Results Act of 1993, require agencies to pursue results-oriented management, whereby program effectiveness is measured in terms of outcomes or impact, rather than outputs, such as activities and processes. Management principles and elements can provide DOD and the military services with a framework for strategic planning and effectively implementing and managing programs. Table 1 describes the framework and its principles and elements. In February 2004, DOD issued its space human capital strategy that established direction for the future and included overall goals for developing and integrating space personnel. To develop the strategy, the DOD Executive Agent for Space established a joint working group comprised of representatives from the Office of the Secretary of Defense, each of the military services, the National Reconnaissance Office, and various other defense organizations. The Office of the Secretary of Defense and the military services reviewed the strategy, and the DOD Executive Agent for Space approved it. The space human capital strategy's goals flow from the goals in DOD's Personnel and Readiness Strategic Plan, which is the integrated strategic plan that includes the major goals that directly support the mission of the Office of the Under Secretary of Defense for Personnel and Readiness. Two of these goals include: (1) integrating active and reserve component military personnel, civilian employees, and support contractors into a diverse, cohesive total force and (2) providing appropriate education, training, and development of the total force to meet mission requirements. The six goals for space professional management identified in the space human capital strategy are to ensure the services develop space cadres to fulfill their unique mission synchronize the services' space cadre activities to increase efficiency and reduce unnecessary redundancies; improve the integration of space capabilities for joint war fighting and intelligence; assign the best space professionals to critical positions; increase the number of skilled, educated, and experienced space professionals; and identify critical positions and personnel requirements for them. The strategy also described approaches designed to accomplish DOD's long-term goals. The approaches provided general direction for departmentwide actions in areas identified as key to the long-term success of the strategy, such as establishing policy concerning human capital development and a professional certification process for space personnel and identifying and defining critical positions and education overlaps and gaps. In addition, the strategy recognized external factors that should be considered departmentwide and by the services in developing implementation actions. Such factors include increasing reliance on space for critical capabilities in the future, the need for more space-qualified people, and the need to develop new systems and technologies to sustain the United States as a world leader in space. The space human capital strategy also identified objectives necessary to achieve the strategy's goals in the areas of leadership, policy, career development, education, training, data collection, management, and best practices. The strategy places responsibility for achieving the objectives with each service and component. The objectives include, among others, promoting the development of a cadre of space professionals within each service, enhancing space education and training, creating management processes to meet future programmatic needs, and identifying and implementing best practices. Table 2 shows the strategy's objectives. DOD has not developed a detailed implementation plan for the key actions in its space human capital strategy that could include more specific implementing actions, identify responsibilities, set specific time frames for completion, and establish performance measures. As previously mentioned, a results-oriented management framework would include a plan with detailed implementation actions and performance measurements, in addition to incorporating performance goals, resources needed, performance indicators, and an evaluation process. DOD's strategic approach, as outlined in its strategy, identifies key actions to meet the space human capital strategy's objectives and indicates three time phases for implementing the actions. However, DOD has not started to develop an implementation plan for its strategy. A DOD official said the department plans to complete an implementation plan by November 2004, while it is implementing the key actions that have been identified in the strategy. Until an implementation plan is developed, the DOD Executive Agent for Space plans to hold meetings of the working group that developed the strategy to discuss space cadre initiatives and integration actions. Before developing an implementation plan, DOD plans to collect information from the services to establish a baseline on their current space cadres, according to a DOD official. Some of the information to be collected includes size, skills, and competencies of the personnel in the services' space cadres; numbers of space positions and positions that are vacant; promotion and retention rates for space personnel; and retirement eligibility and personnel availability projections. The strategy indicates that collecting this information was one of the key actions in the first phase of the strategy's implementation and was to have been completed by April 2004. However, DOD has not requested the information from the services because officials had not completely determined what information will be collected, how it will be analyzed, and how it will be used to develop an implementation plan. DOD has begun implementing some actions identified in the strategy as key to helping further develop and integrate the services' space cadres; however, DOD had not completed any of these actions by the end of our review. Actions currently under way include preparing for an education and training summit; evaluating space cadre best practices; developing policy on human capital development and use; determining the scope, nature, and specialties associated with space personnel certification; and issuing a call for demonstration projects. DOD plans to complete most of the key actions by November 2004, although it has not developed specific plans and milestones for completing each action. The military services vary in the extent to which they have identified and implemented initiatives to develop and manage their space cadres. The Air Force and the Marine Corps have completed space human capital strategies and established organizational focal points with responsibility for managing their space cadres, but the Army and the Navy have not completed these important first steps. The services are executing some other actions to develop and manage their space cadres, and the actions have been implemented to varying extents. Some of the actions include determining what types of personnel and specialties to include in their space cadres and developing or revising their education and training. Even though the services have completed some of these initiatives, many are not complete and will require years to fully implement. DOD has established the overall direction for space human capital development and integration, but the services are responsible for defining their unique space cadre goals and objectives, determining the implementing actions required, and creating a management structure to be responsible for implementation. The Space Commission recommended that the Air Force centralize its space cadre management and concluded that without a centralized management authority to provide leadership, it would be almost impossible to create a space cadre. Even though this recommendation was directed to the Air Force, which has the largest numbers of space professionals and responsibility for the most varied range of space operations, the principle that strong leadership is needed to reach space cadre goals also applies to the other military services. The Air Force approved its space cadre strategy in July 2003, and it is implementing the initiatives it has identified to meet the strategy's goals. The strategy provided guidance on developing and sustaining the Air Force's space cadre. Further, the Air Force developed an implementation plan with time lines for completion of certain initiatives. The Air Force also designated the Air Force Space Command as the focal point to manage Air Force space cadre issues. The Air Force's strategy defined the Air Force's space cadre as the officers, enlisted personnel, reserves, National Guard, and civilians needed to research, develop, acquire, operate, employ, and sustain space systems in support of national security space objectives. The strategy included actions for identifying all space professionals who would make up its space cadre; providing focused career development; and defining career management roles, responsibilities, and tools. Currently, the Air Force has the largest of the services' space cadres with an estimated 10,000 members identified based on their education and experience. The strategy also identified planned resources to implement space cadre initiatives through fiscal year 2009. For fiscal year 2004, the Air Force Space Command received $9.1 million to develop and manage its space cadre. According to Command officials, $4.9 million went to the Space Operations School to develop new space education courses, and the remainder was designated for other space cadre activities. For fiscal year 2009, the funding level is planned to increase to about $21 million to fund the planned initiatives, especially the efforts related to education and training. After the Air Force issued its space cadre strategy, it developed a detailed plan to implement the strategy, and it is executing the initiatives in accordance with its time lines. This implementation plan focuses on six key initiatives, as shown in table 3. According to the Air Force Space Command, the Air Force plans to implement most of these initiatives by 2006. Initiatives related to the development of a National Security Space Institute will likely not be completed by 2006 because, in addition to developing curriculum and organizational structure issues, the Institute will require funding and facilities. Appointed by the Secretary of the Air Force in July 2003, the Commander, Air Force Space Command, is the focal point for managing career development, education, and training for the Air Force space cadre. To assist in executing this responsibility, the Commander established a Space Professional Task Force within the Command to develop and implement initiatives and coordinate them with the national security space community. According to the Commander, the centralized management function with the authority to develop and implement Air Force policy governing career development of Air Force space personnel has enabled the Command to move forward with implementation activities and fully integrate the Air Force's strategy with the Air Force's overall force development program. The Marine Corps has initiated actions to develop its space cadre and has many tasks to implement its initiatives either completed or under way. Although the Marine Corps' space cadre is the smallest of the services with 61 active and reserve officers who were identified based on their education and experience, the Marine Corps has a space cadre strategy to develop and manage its space cadre and has an implementation plan to track initiatives. The space cadre strategy was issued as a part of the DOD space human capital strategy in February 2004. To implement its strategy, the Marine Corps has identified key tasks and established milestones for completion, and it is implementing them. In addition, the Marine Corps has identified a focal point in Headquarters, U.S. Marine Corps, to manage its space cadre. There is no Marine Corps funding specifically for actions to develop its space cadre. Furthermore, the Marine Corps does not anticipate a need for any such funding, according to a Marine Corps official. The Marine Corps' strategy specifies 10 objectives for developing and maintaining space professionals: establish an identifiable cadre of space-qualified enlisted and civilian create and staff additional space personnel positions in the operating create and staff additional space positions at national security space organizations; improve space operations professional military education for all Marine Corps officers; focus the graduate education of Marine Corps space operations students to support Marine Corps needs; leverage interservice space training to ensure the development and proficiency of the space cadre; develop a management process through which interested officers can be assigned to multiple space-related positions during their careers and still compete for promotion with their peers; develop a process and structure for space professionals in the Marine Corps reserves through which they can support operations, training, and exercises through augmentation and mobilization; fully participate in the DOD Executive Agent for Space's efforts to create a space cadre; and incorporate appropriate space professional certification processes into the management of the Marine Corps' space cadre. The Marine Corps has identified actions to reach these objectives and developed an implementation plan with milestones to monitor the completion of these actions. For example, the Marine Corps established a space cadre working group to address issues associated with the identification, training, and assignment of space cadre officers. The Marine Corps also contracted a study to obtain data to help manage Marine Corps space personnel positions, determine space cadre requirements, and assess other services' training and education opportunities. According to the Marine Corps' strategy, the Marine Corps has started integrating joint doctrine for space operations into its professional military education programs and has coordinated with the Naval Postgraduate School to create Marine Corps-specific space systems courses. The Marine Corps has designated the Deputy Commandant for Plans, Policies, and Operations within the Headquarters, U.S. Marine Corps, as the management focal point for space cadre activities. A general officer within this office has overall responsibility for space matters. The focal point for the space cadre is responsible for coordinating and tracking actions to implement the strategy. The Army has taken some actions to develop its space cadre, but it does not have clear goals and objectives for the future because it has not developed a space cadre strategy or identified a focal point to manage its space cadre. Until it adopts a strategy that encompasses a total force of officers, enlisted personnel, and civilians, the Army may not be able to develop sufficient numbers of qualified space personnel to satisfy requirements within the Army and in joint organizations. However, according to Army officials, the Army does not intend to issue a strategy until it decides whether its space cadre should include space officers, enlisted personnel, and civilians because the strategy would be different if the cadre is expanded beyond space operations officers. In 1999, the Army created a career path for its space operations officers and issued career development guidance for them. The Army considers these officers, currently numbering about 148 on active duty, to be its space cadre. The Army's intent in creating the career path was to provide space expertise and capabilities to develop space doctrine, training, personnel, and facilities where they are needed throughout DOD in support of military operations. Since 1999, the Army has developed a specialized training course to provide space operations officers with the essential skills needed to plan and conduct space operations. However, it has not determined the critical positions for space officers or the number of officers needed to enable it to effectively accomplish its goals of supporting Army and DOD-wide operations. Thus, the Army may be training too many or too few space operations officers, and space operations officers may not be placed in the most critical positions to support Army interests in space. The Army is considering whether to expand its definition of its space cadre to include other personnel beyond the space operations officers. The Army is conducting two studies that Army officials said would provide a basis for this decision. In 2001, the Army began a 5-year study to help it determine whether enlisted personnel should be added to its space cadre and, if so, how this would be accomplished. The study is intended to determine how to recruit, train, and develop enlisted space personnel and to assess the possibility of creating a space career management field for them. In June 2004, the Army began a separate 15-month study to provide additional information that would help it decide whether to expand its space cadre definition. A decision on whether to expand the cadre to include additional personnel is not expected until 2005. The Army has not designated a permanent organizational focal point to develop and manage its space cadre. According to Army officials, the Army has to decide whether to expand its space cadre before it can designate a permanent management focal point because these decisions have implications as to which organization should have overall responsibility. Currently, three different organizations have various responsibilities for Army space cadre issues. Operations and Plans within Army headquarters has broad responsibility for policy, strategy, force management, and planning. Two other organizations have management responsibilities for the space operations officers that comprise the current Army space cadre: Army Space and Missile Defense Command provides personnel oversight for the space operations officers and Army Human Resources Command manages space operations officer assignments. According to Army officials, management of space personnel has not been centralized because the Army is a user of space and has integrated its space capabilities into various Army branches. As a result, no single office is charged with providing leadership on space issues and ensuring that the Army's space initiatives are having the desired results. The Navy has initiated steps in identifying and developing its space cadre and has designated an advisor for space cadre issues. However, actions have been limited because it has not developed a space human capital strategy to provide direction and guidance for Navy actions. In addition, the Navy has not provided centralized leadership to develop the strategy and oversee implementation because it does not have a permanent management focal point. The Navy has taken some actions to strengthen space cadre management, including providing funding for the space cadre advisor, an assistant advisor, and contract support in the fiscal year 2005 budget. In addition, the Navy has issued guidance requiring personnel placement officials to coordinate with the space cadre advisor before assigning space cadre personnel to increase the likelihood that they can be placed in appropriate positions to effectively use and develop their space expertise. The Navy has also developed guidance that directs promotion boards to consider space experience when assessing candidates for promotion. Also, senior Navy leaders are engaged in space cadre activities, according to DOD officials. Currently, the Navy has designated 711 active duty officers and about 300 officer and enlisted reserve members as its space cadre, based on their previous education and experience in space activities. Space cadre members serve in positions throughout the different functional areas in the Navy, such as surface warfare and naval aviation. The Navy has not identified active duty enlisted and civilians with space education and experience, although it is in the process of identifying such personnel. The Navy has not completed a strategy for developing and managing its space cadre, even though the requirement for a strategy has been recognized in official guidance. In March 2002, the Navy issued a memorandum requiring the development of a space cadre strategy to guide the Navy in identifying its space requirements. A Navy official said that it was not possible to complete a space cadre strategy without an overall Navy space policy that revised roles and responsibilities for space in the Navy. The Navy published its space policy in April 2004, which reiterated the need for a strategy for developing and managing Navy space personnel. With the policy in place, the Navy plans to complete its strategy by October 2004, according to Navy officials. Lacking a strategy, the Navy has not identified what key actions are needed to build its space cadre, how it intends to implement these actions, and when it expects the key actions to be completed. For example, the Navy has not determined the critical positions it needs to fill with space-qualified personnel, the numbers of personnel it has that should be in its space cadre to meet future needs for Navy and joint operations, or the funding required to implement any planned actions. Further, without an implementation plan that specifies actions, assigns responsibility, provides performance measures, and identifies resources needed, the Navy may not be able to develop and manage its space cadre so that it can effectively participate in Navy and joint space programs. The Navy also lacks a permanent organizational focal point to develop and manage its space cadre and provide centralized leadership on space issues and ensure that the Navy's space initiatives are implemented and having the desired results. Further, the Navy views space as integrated throughout Navy operations and has not created a separate career field for space personnel. In 2002, the Navy appointed a space cadre advisor to enhance career planning and management of space cadre members; however, the position is advisory to members of the space cadre or others interested in working in space issues. Although the space cadre advisor plans to draft the Navy's space cadre strategy, the advisor has had no official responsibility for identifying or implementing actions needed to ensure the development and management of space professionals to meet DOD's future space requirements because the position has not been funded. For example, the space cadre advisor reports to two different offices in the Chief of Naval Operations on various space cadre issues. The United States' increasing reliance on space-based technologies for the success of military operations highlights DOD's need to develop and maintain a cadre of space professionals who are well educated, motivated, and skilled in the demands of space activities. Although DOD has issued a space human capital strategy, the department does not have a plan that explains how it intends to achieve the goals in its strategy. Without such an implementation plan, developed jointly by the DOD Executive Agent for Space and the military services, DOD will not be in a sound position to effectively monitor and evaluate implementation of the strategy. Further, without clear performance measures, DOD and the services would be unable to assess whether actions intended to meet departmentwide goals and objectives are effective. Therefore, it is not clear that DOD can achieve the strategy's purpose of integrating the services' space personnel, to the extent practicable, into an integrated total force of well-qualified military and civilian personnel. Failure to achieve this could jeopardize U.S. primacy in this critical and evolving national security area. The military services' efforts to implement initiatives to develop their space cadres vary and not all initiatives are linked to service strategies and integrated with DOD's overall strategy. Further, some of the initiatives are not fully developed and will require several years to complete. Because the Army and the Navy lack a strategy to provide direction and focus for their efforts to develop their space cadres and provide a basis to assess the progress of their initiatives, it is unclear whether they will have sufficient numbers of space-qualified professionals to meet future requirements in joint and service space planning, programming, acquisition, and operations. Furthermore, without an organizational focal point with responsibilities for managing and coordinating space cadre efforts, the Army and the Navy may not have the ability to develop and retain the appropriate number of personnel with the right skills to meet both their needs and the joint requirements of the national security space community. Until the Army and the Navy develop strategies synchronized with the department's overall strategy and establish a management approach to implementing their strategies, they may not be able to support the department's strategic goals and objectives and thus may undermine efforts to strengthen this important mission area. We recommend that the Secretary of Defense take the following five actions: Direct the DOD Executive Agent for Space, in conjunction with the military services, to develop an implementation plan for the DOD space human capital strategy. The plan should include performance goals, milestones, resources needed, performance indicators, and an evaluation process. Direct the Secretary of the Army to develop a strategy for the Army's space cadre that incorporates long-term goals and approaches and is consistent with the DOD space human capital resources strategy. Direct the Secretary of the Army to establish a permanent organizational focal point for developing and managing the Army's space cadre. Direct the Secretary of the Navy to develop a strategy for the U.S. Navy's space cadre that incorporates the Navy's long-term goals and approaches and is consistent with the DOD space human capital resources strategy. Direct the Secretary of the Navy to establish a permanent organizational focal point in the U.S. Navy for developing and managing the service's space cadre. In commenting on a draft of this report, DOD generally agreed with our report and our recommendations. DOD's comments are reprinted in their entirety in appendix II. DOD also provided technical comments that we have incorporated as appropriate. DOD partially concurred with our recommendation for the Army to establish a permanent organizational focal point for developing and managing the Army's space cadre. DOD stated that two different entities are involved with managing the Army's space cadre and the Army is in the process of determining whether a single organization will manage its space cadre. During our review, Army officials had differing views on the need to establish a single organizational focal point. They told us that the Army wants to decide whether to expand its space cadre beyond military officers before it designates management responsibilities for the space cadre. We believe that the Army should establish a single organizational focal point to develop its space cadre in a timely manner. This would help the Army to develop and retain the appropriate number of personnel with the right skills to meet Army and joint needs. We are sending copies of this report to interested congressional committees; the Secretary of Defense; the DOD Executive Agent for Space; the Secretaries of the Army, the Navy, and the Air Force; and the Commandant of the Marine Corps. 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 staffs have any questions, please contact me at (202) 512-4300. Key contributors to this report are listed in appendix III. To determine whether the Department of Defense's (DOD) space human capital strategy and management approach to implementing the strategy promote the development and integration of the military services' space cadres, we reviewed and analyzed the strategy and compared it to other human capital strategies, the human capital models in our prior reports, and the management principles contained in the Government Performance and Results Act of 1993. We discussed the strategy and its implementation with officials in the Office of the Under Secretary of Defense for Personnel and Readiness and the Assistant Secretary of Defense for Networks and Information Integration. We also discussed the strategy and its implementation with DOD's Executive Agent for Space and the officials from his office who led the development of the strategy. We assessed the actions taken to date to implement the strategy. We also discussed whether the strategy would effectively integrate the services' efforts with officials in each of the military services and at the National Reconnaissance Office. Specifically, for the military services, we interviewed officials and gathered information at the Air Force Space Command, Peterson Air Force Base, Colorado; the Army Office of the Deputy Chief of Staff for Operations and Plans, Arlington, Virginia; the Army Space and Missile Defense Command, Arlington, Virginia; the Navy Space Cadre Advisor, Arlington, Virginia; and the Office of Plans, Policies, and Operations, Headquarters, U.S. Marine Corps, Arlington, Virginia. To assess the extent to which the military services have planned and implemented actions to develop and manage their space cadres, we analyzed documentation on strategies, initiatives, and other implementing actions at each service and discussed them with service officials. Locations visited to accomplish this objective were the Air Force Space Command, Peterson Air Force Base, Colorado; the Air Force Space Operations School, Colorado Springs, Colorado; the Army Office of the Deputy Chief of Staff for Operations and Plans, Arlington, Virginia; the Army Space and Missile Defense Command, Arlington, Virginia; the Army Force Development and Integration Center, Colorado Springs, Colorado; the Navy Space Cadre Advisor, Arlington, Virginia; and the Office of Plans, Policies, and Operations, Headquarters, U.S. Marine Corps, Arlington, Virginia. We also met with officials from the National Reconnaissance Office, but we did not assess its workforce plan because military personnel assigned to the office are drawn from the space cadres of the military services. We conducted our review from October 2003 through June 2004 in accordance with generally accepted government auditing standards. We did not test for data reliability because we did not use DOD generated data in our analysis of DOD's management approach. In addition to the individual named above, Alan M. Byroade, John E. Clary, Raymond J. Decker, Linda S. Keefer, Renee S. McElveen, and Kimberly C. Seay also made key contributions to this report. 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."

The Department of Defense (DOD) relies on space for many critical capabilities, and its continued success in space operations depends on having sufficient space-qualified personnel. Space-qualified personnel are needed to develop technology, doctrine, and concepts and operate complex systems. In the National Defense Authorization Act for Fiscal Year 2004, Congress required DOD to develop a strategy for developing and integrating national security space personnel. DOD completed it in February 2004. Congress also required GAO to assess DOD's space human capital strategy and the military services' efforts to develop their space personnel. In the first of two required reports, GAO assessed (1) whether DOD's space human capital strategy and management approach promote development and integration of the services' space personnel and (2) the extent of the services' initiatives to develop and manage their space personnel. DOD's space human capital strategy is a significant first step that promotes the development and integration of DOD's space personnel by providing strategic goals and objectives; however, DOD does not have a complete results-oriented management approach to implement the strategy because it does not include an implementation plan that details specific actions, time frames, and evaluation measures. The space human capital strategy provides general direction for developing and integrating DOD space personnel, and it identified key actions needed for implementation. DOD has not completed any of these actions. Without an implementation plan, DOD will not be in a sound position to effectively monitor and evaluate implementation of the strategy and achieve the strategy's purpose of integrating the services' space personnel into a cohesive DOD total force. The military services vary in the extent to which they have identified and implemented initiatives to develop and manage their space personnel. The Air Force and the Marine Corps have taken significant actions in developing and managing their space personnel, including developing space human capital strategies and designating organizational focal points. The Air Force, which has the largest number of space personnel, approved its space human capital strategy in July 2003, and it is implementing its initiatives. The other services are working on similar initiatives and have completed some, but many will take years to fully implement. The Army's and the Navy's actions in developing their space personnel have been limited because they do not have clear goals and objectives for developing their space personnel or organizational focal points to manage them. Without these tools, the Army and the Navy may not be able to determine their requirements for space personnel and develop sufficient numbers of space personnel with the necessary training, education, and experience to meet service and joint needs.

DOD increasingly relies on advanced technology in its weapons for effectiveness on the battlefield and actively seeks to include foreign partners in weapon system development and acquisition. DOD's policy also encourages the sale of certain weapons to foreign governments through the Foreign Military Sales Program and direct commercial sales made by companies. While these efforts have the potential to enhance coalition operations and reduce weapons' unit costs, DOD has acknowledged that the efforts also risk making U.S. technologies potentially vulnerable to exploitation. DOD reported that an increasing number of countries have reverse engineering capability and actively seek to obtain U.S. technology through various means. As a method to protect critical technologies, the Under Secretary of Defense for Acquisition, Technology, and Logistics directed the military services in 1999 to implement anti-tamper techniques. While the techniques will not prevent exploitation, they are intended to delay or discourage attempts to reverse engineer critical technologies in a weapon system or develop countermeasures to a system or subsystem. In 2001, the Under Secretary of Defense for Acquisition, Technology, and Logistics designated the Air Force as the Executive Agent responsible for implementing DOD's anti-tamper policy. The Executive Agent oversees an annual budget of about $8 million per year to implement policy and manage anti-tamper technology projects through the Air Force Research Laboratory. DOD, in conjunction with the Air Force Research Laboratory and the Department of Energy's Sandia National Laboratories, also holds periodic information sessions to educate the acquisition community about anti-tamper policy, guidance, and technology developments. In addition, military services and defense agencies, such as the Missile Defense Agency, have an anti-tamper focal point to coordinate activities. Program managers are responsible for considering anti-tamper measures on any weapon system with critical technologies. Since it is not feasible to protect every technology, program managers are to conduct an assessment to determine if anti-tamper protection is needed. The first step of the decision process is to determine if the system has critical technologies. If program managers determine the system has no critical technologies, they are to document that decision according to draft guidance. Program managers of systems that contain critical technologies complete the remaining steps of the process. Based on draft guidance, program managers are to conceptually address how they will implement anti- tamper measures at system development, otherwise known as milestone B. DOD's anti-tamper decision process is illustrated in figure 1. Program managers can obtain assistance on their assessments from government laboratories, contractors, and the intelligence community. They are required to document the decision to use or not to use anti- tamper techniques in a classified annex of the program protection plan, which is subject to approval from the program's milestone decision authority. Anti-tamper techniques vary depending on the type of protection the system requires. An example of an anti-tamper technique is software encryption, which scrambles software instructions to make them unintelligible without first being reprocessed through a deciphering technique. Another example is a thin opaque coating placed on microelectronic components, which makes it difficult to extract or dissect the components without great damage. Programs can apply multiple anti- tamper techniques to a critical technology. For example, a program could encrypt critical data on a microelectronic chip that is also covered with a protective coating. Each layer of protection could act as an obstacle to reverse engineering. Implementation of the anti-tamper policy has been hampered by several factors. First, identification of critical technology is subject to interpretation and program managers and DOD officials can and have arrived at different conclusions about what needs to be protected. Second, applying anti-tamper protection can take time and money, which may compete with a program manager's cost and schedule objectives. Finally, some programs found it difficult to apply anti-tamper techniques when the techniques were not fully developed, and others were unsure which techniques were available to them. In general, the later anti-tamper techniques are applied, the more difficult and costly it can be to implement. Thus far, support to help program managers address some of these factors has been limited. DOD officials acknowledged that the identification of critical technologies--a basis for determining if anti-tamper protection is needed--is subjective, which can result in different conclusions regarding what needs protection. DOD's Program Managers Anti-Tamper Handbook defines technology as critical if compromise results in degrading combat effectiveness, shortening the expected combat life of the system, or significantly altering program direction. While a broad definition allows for flexibility to determine what is critical on individual systems, it may increase the risk that the same technology is protected on some systems but not on others or that different conclusions can be reached on whether programs have critical technologies. For example: An official from an intelligence agency described a case where two services used the same critical technology, but only one identified the technology as critical and provided protection. The intelligence agency official speculated that if exploited, knowledge gained from the unprotected system could have exposed the technology on both systems to compromise. While both systems were ultimately protected, the intelligence agency official stated that the situation could occur again. Officials from the Executive Committee told us that two program managers stated that their systems had no critical technologies and therefore were not subject to the anti-tamper policy. Both managers were directed by the Executive Committee to reconsider their determination and apply anti-tamper protection. As a result, one program is in the process of determining which technologies are critical, and the other program is applying anti-tamper protection as a condition to export the system. While different conclusions can be reached regarding what is critical, various organizations can serve as a check on a program manager's assessment. However, no organization has complete information or visibility of all programs across the services and agencies. For example, the anti-tamper Executive Agent and the military service focal points do not have full knowledge about which program offices have or have not identified critical technologies or applied anti-tamper protection. In 2001, DOD attempted to collect such information, but not all programs provided data and DOD did not corroborate what was provided to ensure that program officials were consistently assessing critical technologies. The Executive Agent stated that there are no plans to update this data. Conducting oversight over program managers' assessments may be difficult because of limited resources. Specifically, the Executive Agent has two full-time staff and the military service focal points perform duties other than anti-tamper management. Furthermore, according to a military official, program offices that determine they have no critical technologies are not required to obtain the focal points' concurrence. While other organizations can review a program manager's critical technology assessment as part of various acquisition and export processes, they may not have a full perspective of the assessments made by all programs across the services and the agencies. For example, different milestone decision authorities only review an individual program manager's critical technology decisions for programs coming under their responsibility. Also, the Executive Committee may weigh in on the determinations, but it only reviews exports involving stealth technology. While it was apparent that the systems had critical technologies, some program managers needed assistance to determine which specific technologies were critical. For example, a program office tasked the contractor to identify critical technologies, and it has worked for months with the contractor to agree upon and finalize a list of critical technologies on the system. Also, an intelligence official, who is available to assist program managers in assessing their systems' criticality, found that some program managers identified too many technologies as critical and that others did not identify all of the systems' critical elements. In one instance, a program manager indicated that a system had 400 critical technologies, but an intelligence agency narrowed down the list to about 50 that it considered critical. In another case, a program manager concluded that an entire system was one critical technology, but the intelligence agency recommended that the system's technologies be broken down and identified approximately 15 as critical. Although there are various resources to help program managers identify critical technologies, they may have limited utility, or may not be known, and therefore not requested. For example, the Militarily Critical Technologies List--cited in guidance as a primary reference for program managers--may not be up to date and may not include all technologies, according to some DOD officials. Another resource--the Program Managers Anti-Tamper Handbook--contains information regarding critical technology determinations, but program managers are not always aware that the handbook exists, in part because it is not widely distributed. In addition, the Defense Intelligence Agency can conduct an independent assessment of a system's critical elements and technologies, if requested by the program manager. However, many officials we interviewed were unaware that the agency provides this assistance. According to a military official, the focal points are available to review a program manager's assessment if requested. In some instances, program managers may have differing perceptions of what constitutes a critical technology. According to DOD's guidance, critical technologies can be either classified or unclassified. However, an anti-tamper focal point stated that there is a perception that the anti- tamper policy only applies to classified programs. We found in one instance that the manager for a weapon program stated that the program did not require anti-tamper protection because it had no critical technologies that were classified. Applying anti-tamper protection takes money and time, which can affect a program manager's cost and schedule objectives. Generally, anti-tamper implementation is treated as an added requirement that is not separately funded for most programs. Program officials acknowledged that anti- tamper costs can be difficult to estimate and isolate because they are intertwined with other costs, such as research and development or production costs. As we have found in prior work, the later a requirement is identified, the more costly it is to achieve. Most programs we visited experienced or estimated cost increases, and some encountered schedule delays as they attempted to apply anti-tamper techniques. For example: A program official told us the anti-tamper protection for a program upgrade increased both design and production costs for the receiver unit. The program official stated that the anti-tamper protection increased total unit cost by an estimated $31 million, or 10 percent. Program officials expressed concern that unit cost increases may affect procurement decisions, particularly for one service, which is the largest acquirer of units and may be unable to purchase the proposed number. A program office estimated that it needs a budget increase of $56 million, or 10 percent, to fund the desired anti-tamper protections. Officials from that program told us that the existing program budget was inadequate to fund the added anti-tamper requirements. As a result, the program manager requested, and is waiting for, separate funding before attempting to apply anti-tamper protection to the system. One program office awarded a contract modification for the design, implementation, and testing of anti-tamper techniques valued at $12.5 million. Initially, the contractor had estimated the anti-tamper costs to be $35 million, but the program office did not approve all techniques suggested by the contractor. In addition, the contractor estimated that the recurring unit price for anti-tamper protection on future production lots may be $3,372 per unit. The U.S. government and the contractor have not completed unit price negotiations. Program officials told us that anti-tamper implementation contributed to a 6-month schedule delay. Another program office estimated that $87 million is needed to protect two critical technologies with multiple anti-tamper techniques. The program office expects that half of the anti-tamper budget will be used to test the techniques. The anti-tamper protection will only be applied if the system is approved for export. At that time, program officials will reexamine the anti-tamper cost estimates. In addition, it may take 5 years to adequately apply the techniques. Officials from an international program stated that, thus far, they have experienced a 60-day schedule delay while they wait for the contractor to estimate the system's anti-tamper cost. Program officials stated that the potential for increased costs and additional schedule delays is high. Program officials and representatives from the Executive Committee stated that the cost of anti-tamper protection can be significantly higher for an international program for various reasons, including that the U.S. version and the international version of the system may require different anti-tamper techniques. Cost and schedule impacts may also be more significant if the programs are further along in the acquisition process when program offices first attempt to apply anti-tamper protection. Several programs that have experienced significant cost increases or delays were in or beyond the program development phase when they attempted to apply anti-tamper techniques. For example, when the anti-tamper policy was issued, one program had just obtained approval to begin system development and program officials believed it was too late to implement anti-tamper protection. As a result, the program received an interim waiver of the anti-tamper policy, and it only plans to apply anti-tamper techniques if the system is approved for export. While DOD has not systematically collected cost data for anti-tamper application across programs, DOD officials have stated that it is more cost-effective for programs to consider anti-tamper requirements at program inception, rather than later in the acquisition process. An official from a program that applied anti-tamper techniques in the production phase stated that ideally a program should identify its anti- tamper needs, including cost and technology, as early as possible. Recent Army anti-tamper guidance indicates that programs should receive approval for their preliminary anti-tamper plans at the concept stage. Anti-tamper techniques can be technically difficult to incorporate on a weapon system, such as when the technology is immature. DOD is working to oversee the development of generic anti-tamper techniques and tools to help program managers identify potential techniques, but many of these efforts are still in progress and it is uncertain how they will help program managers. While program managers want knowledge about generic techniques, they ultimately have to design and incorporate techniques needed for their unique systems to ensure protection of critical technologies and to meet performance objectives. Problems in applying anti-tamper techniques typically arose when the programs were already in design or production or when the techniques were not fully developed or specifically designed for the system. For example: Officials from a program told us that they experienced problems when applying an anti-tamper protective coating. Because the team applying the coating did not coordinate with teams working on other aspects of the system, the problems with the coating were not discovered until just before production. Prior to an initial development test, the program office received a temporary waiver to test the system without the anti-tamper technique because the coating caused malfunctioning. The program office and its contractor are working to resolve issues with the anti-tamper technique. A program office was not able to copy anti-tamper techniques used by a similar program and, therefore, attempted to apply a generically developed anti-tamper coating, which resulted in problems. Specifically, the coating caused the system to malfunction, so the program office requested assistance from a national laboratory, but the laboratory's solution melted key components of the system. Therefore, the program office requested that the contractor develop a new coating and other methods of protection for the system. The contractor's anti- tamper techniques were successfully applied to the system. One program required advanced anti-tamper techniques to protect miniaturized internal components, but the technology was still in development and not available for immediate application. According to program officials, research and development of the anti-tamper technique was originally expected to be completed in 2002 and is now estimated to be available in 2006. Currently, officials are uncertain that the technique will meet their needs because the technique is being generically developed. In the absence of being able to apply the anti- tamper technique, the program received approval from DOD to use procedural protections, whereby U.S. military personnel provide physical security of the system when it is used in foreign countries, which includes locking the unit in a protected room to restrict access by foreign nationals. DOD officials stated that physical security can be less reliable than actual anti-tamper protection. Some program managers told us that they need more help in deciding what anti-tamper techniques they should apply to their individual systems. To provide information, DOD has a classified database that describes current anti-tamper techniques. An Air Force Research Laboratory official stated that they are in the process of updating this database, developing a rating system on the value of various techniques to be included in the database, and creating a classified technology road map that will prioritize the needs for various anti-tamper techniques. These tools are currently unavailable. DOD and Sandia National Laboratories also have provided information on anti-tamper techniques and tools to program managers at periodic workshops where attendance is voluntary. To further assist program managers, DOD is in the process of overseeing the development of generic anti-tamper techniques, but it is uncertain to what extent such techniques address a program's specific needs. In 2001, DOD issued several contracts to encourage anti-tamper technology development. To date, several defense contractors have provided anti- tamper technology concepts, but according to the Executive Agent, programs need to further develop the technology before it can be applied to and function on a particular system. According to Air Force Research Laboratory and Sandia National Laboratories officials, generic anti-tamper techniques can be considered, but program managers have to design and incorporate the techniques needed for their unique systems. Program managers ultimately have to ensure that the techniques protect critical technologies and do not adversely affect performance objectives for the system. Anti-tamper protection is one of the key ways DOD can preserve U.S. investment in critical technologies, while operating in an environment of coalition warfare and a globalized defense industry. However, implementation of the anti-tamper policy, thus far, has been difficult--in part because DOD has not developed an implementation strategy to ensure success. For program managers expected to implement anti-tamper protection, the policy can compete with their goals of meeting cost and schedule objectives, particularly when the anti-tamper requirement is identified late in the system development process. Without providing more oversight and guidance about what needs to be protected and how to do so, DOD is at risk of program managers making decisions on individual programs that can result in unprotected technologies and have negative consequences for maintaining the military's overall technological advantage. We are recommending that the Secretary of Defense direct the Under Secretary of Acquisition, Technology, and Logistics and the anti-tamper Executive Agent to take the following five actions to improve oversight and assist program offices in implementing anti-tamper protection on weapon systems. To better oversee identification of critical technologies for all programs subject to the anti-tamper policy, we recommend that the Secretary of Defense direct the Under Secretary for Acquisition, Technology, and Logistics, in coordination with the Executive Agent and the focal points, to (1) collect from program managers information they are to develop on critical technology identification and (2) appoint appropriate technical experts to centrally review the technologies identified for consistency across programs and services. To better support program managers in the identification of critical technologies, the Secretary of Defense should direct the Under Secretary for Acquisition, Technology, and Logistics, in coordination with the Executive Agent and the focal points, to (1) continue to identify available anti-tamper technical resources, (2) issue updated policy identifying roles and responsibilities of the technical support organizations, and (3) work with training organizations to ensure training includes practical information on how to identify critical technologies. To help minimize the impact to program cost and schedule objectives, the Secretary of Defense should direct the Under Secretary for Acquisition, Technology, and Logistics to work with program managers to ensure that the cost and techniques needed to implement anti-tamper protection are identified early in a system's life cycle and to reflect that practice in guidance and decisions. To maximize the return on investment of DOD's anti-tamper technology efforts, the Secretary of Defense should direct the Executive Agent to monitor the value of developing generic anti-tamper techniques and evaluate the effectiveness of the tools, once deployed, in assisting program managers to identify and apply techniques on individual programs. To ensure successful implementation of the anti-tamper policy, the Secretary of Defense should direct the Under Secretary for Acquisition, Technology, and Logistics to develop a business case that determines whether the current organizational structure and resources are adequate to implement anti-tamper protection and if not, what other actions are needed to mitigate the risk of compromise of critical technologies. In written comments on a draft of this report, DOD partially concurred with one recommendation and offered an alternative solution, which we did not incorporate. DOD concurred with our remaining four recommendations and provided alternative language for two, which we incorporated as appropriate. DOD's letter is reprinted in the appendix. DOD partially concurred with our recommendation to collect and centrally review the program's critical technology identifications and proposed, instead, that it develop a standardized process to minimize subjectivity, incorporate that process into anti-tamper policy, and monitor subsequent implementation. As part of its rationale, DOD stated that technical representatives in the services currently work with program managers to implement the anti-tamper policy and that quarterly conferences and seminars are ways to disseminate important information to program managers. We believe DOD's proposal is an improvement over the current process given that program managers need more technical support and guidance to identify critical technologies. However, we do not believe DOD's proposal is sufficient because a central review mechanism is needed to ensure consistent critical technology identification across the services and the agencies. Without central visibility over program managers' critical technology identifications, the risk exists that the same technology is protected on some systems but not on others. Knowledge gained from unprotected systems can expose critical technology to compromise, which minimizes the impact of anti-tamper protection. In addition, DOD's dissemination of information at conferences may be limited because conference attendance is voluntary and all program managers may not attend and receive the information. Given the need for consistency and a central review, we did not revise our recommendation. DOD concurred with our remaining recommendations, but offered alternative language for two, which we incorporated. Specifically, for our recommendation aimed at better supporting program managers in identifying critical technologies, DOD proposed adding language that underscored the need for identifying technical resources and maintaining up-to-date policies on technical support organizations' roles and responsibilities. While DOD has identified some resources and listed them in several documents, it has not developed a comprehensive list of resources to assist program managers. Therefore, we added to our recommendation that DOD continue to identify available anti-tamper technical resources. For our recommendation that DOD evaluate generic anti-tamper techniques, DOD proposed language that offered greater flexibility, which seemed reasonable and we incorporated. To determine how DOD implemented the anti-tamper policy, we collected data and interviewed officials from 17 programs, which were identified by DOD as having experience with implementing the policy or by us through our review. Twelve of the 17 programs reported that their systems had critical technologies, and most were in various stages of implementing the anti-tamper policy. From those programs we selected six for an in-depth review. We conducted structured interviews with the six programs that had identified critical technologies on their systems to understand their experiences with applying anti-tamper techniques. We selected systems that represented a cross-section of acquisition programs and various types of systems in different phases of development. To the extent possible, when selecting the programs for an in-depth review, we considered factors that may increase a system's vulnerability and exposure to exploitation. We also considered whether the system was approved for export by examining the Defense Security Cooperation Agency's data on foreign military sales. In addition, we analyzed available program information from the anti-tamper Executive Agent and the military focal points to determine programs reporting critical technologies and anti-tamper plans. DOD acknowledged that the information was incomplete, and we did not independently verify the reliability of the data. We supplemented the program information by interviewing the Executive Agent, the military focal points, representatives from the intelligence community, DOD's Executive Committee, the Department of Energy's Sandia National Laboratories, the Air Force Research Laboratory, defense contractors, and an electronic security specialist. We also discussed DOD's anti-tamper policy with current and former officials from the Office of the Secretary of Defense. To observe DOD's training of program managers, we attended a DOD anti-tamper information workshop and a quarterly review. We analyzed pertinent DOD policies, directives, instructions, and guidance governing anti-tamper protection on systems. We also conducted a literature search to obtain information on program protection and industry practices related to anti-tamper measures. We are sending copies of this report to interested congressional committees; the Secretary of Defense; and the Director, Office of Management and Budget. We 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 staff have any questions concerning this report, please call me at (202) 512-4841. Others making key contributions to this report were Anne-Marie Lasowski, Yelena T. Harden, Gregory K. Harmon, and Holly Ciampi.

The U.S. government has invested hundreds of billions of dollars in developing the most sophisticated weapon systems and technologies in the world. Yet, U.S. weapons and technologies are vulnerable to exploitation, which can weaken U.S. military advantage, shorten the expected combat life of a system, and erode the U.S. industrial base's technological competitiveness. In an effort to protect U.S. technologies from exploitation, the Department of Defense (DOD) established in 1999 a policy directing each military service to implement anti-tamper techniques, which include software and hardware protective devices. This report reviews DOD's implementation of the anti-tamper policy as required by the Senate report accompanying the National Defense Authorization Act for Fiscal Year 2004. Program managers have encountered difficulties in implementing DOD's anti-tamper policy on individual weapon systems. First, defining a critical technology--a basis for determining the need for anti-tamper--is subjective, which can result in different conclusions regarding what needs anti-tamper protection. While different organizations can check on program managers' assessments, no organization has complete information or visibility across all programs. Some program managers said they needed assistance in determining which technologies were critical, but resources to help them were limited or unknown and therefore not requested. Second, anti-tamper protection is treated as an added requirement and can affect a program's cost and schedule objectives, particularly if the program is further along in the acquisition process. Programs GAO contacted experienced or estimated cost increases, and some encountered schedule delays when applying antitamper protection. Officials from one program stated that their existing budget was insufficient to cover the added cost of applying anti-tamper protection and that they were waiting for separate funding before attempting to apply such protection. Finally, anti-tamper techniques can be technically difficult to incorporate in some weapon systems--particularly when the techniques are not fully developed or when the systems are already in design or production. One program that had difficulty incorporating the techniques resorted to alternatives that provided less security. While DOD is overseeing the development of generic anti-tamper techniques and tools to help program managers, many of these efforts are still in progress, and program managers ultimately have to design and incorporate techniques needed for their unique systems.

To qualify for home health care, a beneficiary must be confined to his or her residence (that is, "homebound"); require intermittent skilled nursing, physical therapy, or speech therapy; be under the care of a physician; and have the services furnished under a plan of care prescribed and periodically reviewed by a physician. If these conditions are met, Medicare will pay for part-time or intermittent skilled nursing; physical, occupational, and speech therapy; medical social services; and home health aide visits. Beneficiaries are not liable for any coinsurance or deductibles for these home health services, and there is no limit on the number of visits for which Medicare will pay. Medicare pays for home health care on the basis of the reasonable costs actually incurred by an agency (costs that are found to be necessary and related to patient care), up to specified limits. The BBA reduced these cost limits for reporting periods beginning on or after October 1, 1997. The Medicare home health benefit is one of the fastest growing components of Medicare spending. From 1989 to 1996, part A expenditures for home health increased from $2.4 billion to $17.7 billion--an increase of over 600 percent. Home health payments currently represent 13.5 percent of Medicare part A expenditures. At Medicare's inception in 1966, the home health benefit under part A provided limited posthospital care of up to 100 visits per year after a hospitalization of at least 3 days. In addition, the services could only be provided within 1 year after the patient's discharge and had to be for the same illness. Part B coverage of home health was limited to 100 visits per year. These restrictions under part A and part B were eliminated by the Omnibus Reconciliation Act of 1980 (ORA) (P.L. 96-499), but little immediate effect on Medicare costs occurred. benefit to grow as patients were discharged from the hospital earlier in their recovery periods. However, HCFA's relatively stringent interpretation of coverage and eligibility criteria held growth in check for the next few years. Then, as a result of court decisions in the late 1980s, HCFA issued guideline changes for the home health benefit that had the effect of liberalizing coverage criteria, thereby making it easier for beneficiaries to obtain home health coverage. For example, HCFA policy had been that daily skilled nursing services provided more than four times a week were excluded from coverage because such services were not part-time and intermittent. The court held that regardless of how many days per week services were required they would be covered so long as they were part-time or intermittent. HCFA was then required to revise its coverage policy. Daily skilled nursing care is now covered for a period of up to 3 weeks. Additionally, another court decision prevented HCFA's claims processing contractors from denying certain physician-ordered services unless the contractors could supply specific clinical evidence that indicated which particular service should not be covered. The combination of these changes has had a dramatic effect on utilization of the home health benefit in the 1990s, both in terms of the number of beneficiaries receiving services and in the extent of these services. (The appendix contains a figure that shows growth in home health expenditures in relation to the legislative and policy changes.) For example, ORA and HCFA's 1989 home health guideline changes have essentially transformed the home health benefit from one focused on patients needing short-term care after hospitalization to one that serves chronic, long-term care patients as well. The number of beneficiaries receiving home health care has more than doubled in recent years, from 1.7 million in 1989 to about 3.9 million in 1996. During the same period, the average number of visits to home health beneficiaries also more than doubled, from 27 to 72. beneficiaries needing short-term care following a hospital stay to those receiving care for chronic conditions. To gain some measure of control over payments immediately, the BBA made some significant changes to the cost-based reimbursement system used for home health care while HCFA is developing a PPS for the longer term. Home health agency cost limits had been set separately for agencies in rural and urban areas, at 112 percent of the mean costs of freestanding agencies. Limits will now be set at 105 percent of the median costs of freestanding agencies. In addition, the BBA added a limit on the average per-beneficiary payment received during a year. This limitation is based on a blend--75 percent on the agency's 1994 costs per beneficiary and 25 percent on the average regional per beneficiary costs in that year, increased for inflation in the home health market basket index since then. Hospital-based agencies have the same limits. The per-visit cost-limit provision of Medicare's reimbursement system for home health agencies gave some incentives for providers to control their costs, and the revised per-visit and per-beneficiary limits should increase those incentives. However, for providers with per-visit costs considerably below their limits, there is little incentive to control costs, and per-visit limits do not give any incentive to control the number of visits. On the other hand, the new per-beneficiary limit should give an incentive to not increase the number of visits per beneficiary above the 1994 levels used to set this limit. However, the number of visits per beneficiary had already more than doubled by 1994 from that in 1989, so the per-beneficiary limits will be based on historically high visit levels. Moreover, per-beneficiary limits give home health agencies an incentive to increase their caseloads, particularly with lighter-care cases, perhaps in some instances cases that do not even meet Medicare coverage criteria. This creates an immediate need for more extensive and effective review by HCFA of eligibility for home health coverage. include selecting an appropriate unit of service, providing for adjustments to reflect case complexity, and assuring that adequate data are available to set the initial payment rates and service use parameters. The primary goal of a PPS is to give providers incentives to control costs while delivering appropriate services and at the same time pay rates that are adequate for efficient providers to at least cover their costs. If a PPS is not properly designed, Medicare will not save money, cost control incentives will at best be weak, or access to and quality of care can suffer. With the altered incentives inherent in a PPS, HCFA will also need to design and implement appropriate controls to ensure that beneficiaries receive necessary services of adequate quality. Most of the specifics about the home health PPS required by the BBA were left to HCFA's discretion. This delegation was appropriate because insufficient information was available for the Congress to make the choices itself. Many major decisions need to be made. First, HCFA must choose a unit of service, such as a visit or episode of care, upon which to base payment. A per-visit payment is not a likely choice because it does little to alter home health agency incentives and would encourage making more, and perhaps shorter, visits to maximize revenues. An episode-of-care system is the better choice, and HCFA is looking at options for one. Designing a PPS based on an episode of care also raises issues. The episode should generally be long enough to capture the care typically furnished to patients, because this tends to strengthen efficiency incentives. A number of ways to accomplish this goal exist. For example, HCFA could choose to set a constant length of time as the episode. In 1993, to cover 82 percent of home health patients, the episode would have to have been long enough to encompass 90 visits, which, assuming four visits a week on average, would mean an episode of about 150 days. Because of the great variability across patients in the number of visits and length of treatment, this alternative places very great importance on the method used to distinguish the differences among patients served across home health agencies in order to ensure reasonable and adequate payments. with mainly physical therapy, while a patient with arthritis recovering from the same injury might need a longer period with perhaps more home health aide services. This option would also require a good method for classifying patients into the various patient categories and determining resource needs. A third option is to use a fixed but relatively brief period, such as 30 or 60 days, sufficient to cover the needs of the majority of patients, with subsequent periods justified by the patient's condition at the end of each period. The effectiveness of this option would, among other things, depend on a good process for verifying and evaluating patient condition periodically and adequate resources to operate that process. Also, HCFA will need to design a utilization and quality control system to guard against decreases in visits, which could affect quality, and home health agencies treating patients who do not quality for benefits. This will be necessary because an episode-of-care system gives home health agencies an incentive to maximize profits by decreasing the number of visits during the episode, potentially harming quality of care. Such a system also gives agencies an incentive to increase their caseloads, perhaps with patients who do not meet Medicare's requirements for the benefit. The effectiveness of PPS will ultimately depend on the effective design of these systems and devoting adequate resources to operate them. Another major decision for HCFA, closely related to the unit-of-service decision, is the selection and design of a method to adjust payments to account for the differences in the kinds of patients treated by various home health agencies, commonly called a case-mix adjuster. Without an adequate case-mix adjuster, agencies that serve populations that on average require less care would be overcompensated. Also, agencies would have an incentive to seek out patients expected to need a low level of care and shun those needing a high level of care, thus possibly affecting access to care. Currently, there is limited understanding of the need for, and content of, home health services and, at the same time, a large variation across agencies in the extent of care given to patients with the same medical conditions. HCFA is currently testing a patient classification system for use as a case-mix adjuster, and the BBA requires home health agencies to submit to HCFA the patient-related data HCFA will need to apply this system. However, it is too early to tell whether HCFA's efforts will result in an adequate case-mix adjuster. PPS rates. Historical data on utilization and cost of services form the basis for calculating the "normal" episode of care and the cost of services, so it is important that those data are adequate for that purpose. Our work and that of the HHS Inspector General has found examples of questionable costs in home health agency cost reports. For example, we reported in August 1995 on a number of problems with contractor payments for medical supplies such as surgical dressings, which indicate that excessive costs are being included and not removed from home health agency cost reports. Also, the Inspector General found substantial amounts of unallowable costs in the cost reports of a large home health agency chain, which was convicted of fraud on the basis of these findings. Earlier this year, we suggested that it would be prudent for HCFA to audit thoroughly a projectable sample of home health agency cost reports. The results could then be used to adjust HCFA's cost database to help ensure that unallowable costs are not included in the base for setting prospective rates. In response to a presidential directive, HCFA is planning to audit about 1,800 home health agency cost reports over the next year, about double the number that it otherwise would have audited. If these audits are thorough and the results are properly used, this effort could represent a significant step toward improving HCFA's home health cost database. A good cost database could be a considerable aid to HCFA in calculating the initial payment rates under PPS. medical review of 80 high-dollar claims it had previously processed. The intermediary found that it should have denied 46 of them in whole or in part. Also, Operation Restore Trust, a joint effort by federal and several state agencies to identify fraud and abuse in Medicare and Medicaid, found very high rates of noncompliance with Medicare's coverage conditions. For example, in a sample of 740 patients drawn from 43 home health agencies in Texas and 31 in Louisiana that were selected because of potential problems, some or all of the services received by 39 percent of the beneficiaries were denied. About 70 percent of the denials were because the beneficiary did not meet the homebound definition. Although these are results from agencies suspected of having problems, they illustrate that substantial amounts of noncovered care are likely to be reflected in HCFA's home health care utilization data. Because of these problems, it would also be prudent for HCFA to conduct thorough on-site medical reviews, which increase the likelihood of identifying whether patients are eligible for services, of a projectable sample of agencies to give it a basis on which to adjust utilization rates for purposes of establishing a PPS. We are not aware that such a review is under way or planned. A PPS for home health should enable Medicare to give agencies increased incentives to control costs and to slow the growth in program payments. A reduction in program safeguards contributed to the cost growth of the 1990s, and HCFA will need to develop a utilization and quality control program to protect against the likely incentives that agencies will have to increase caseloads unnecessarily and to diminish care, and harm quality. Moreover, a PPS alone will not eliminate home health fraud and abuse. Continued vigilance will be needed, and the BBA gives HCFA additional tools that should help it protect the program. health claims in fiscal year 1987, the contractors' review target was lowered by 1995 to 3.2 percent of all claims (or even, depending on available resources, to a required minimum of 1 percent). We found that a lack of adequate controls over the home health program, such as little contractor medical review and limited physician involvement, makes it nearly impossible to know whether the beneficiary receiving home care qualifies for the benefit, needs the care being delivered, or even receives the services being billed to Medicare. Also, because of the small percentage of claims selected for review, home health agencies that bill for noncovered services are less likely to be identified than was the case 10 years ago. In addition, because relatively few resources had been available for auditing end-of-year provider cost reports, HCFA has little ability to identify whether home health agencies were charging Medicare for costs unrelated to patient care or other unallowable costs. Because of the lack of adequate program controls, some of the increase in home health costs likely stemmed from abusive practices. The Health Insurance Portability and Accountability Act of 1996 (HIPAA) recently increased funding for program safeguards. However, per-claim expenditures will remain below the level in 1989, after adjusting for inflation. We project that in 2003, payment safeguard spending as authorized by HIPAA will be just over one-half of the 1989 per-claim level, after adjusting for inflation. Finally, as discussed earlier, a PPS will give home health agencies incentives to increase the number of patients they treat and to cut back on the amount of care furnished to patients in order to maximize profits. To safeguard against the new incentives of a PPS, HCFA needs to implement utilization and quality control systems specifically designed to address the PPS's incentives. Without adequate monitoring, home health agencies that choose to do so could game the system to maximize profits or take actions that reduce quality. The Congress and the administration recently have taken actions to combat fraud and abuse in the provision of and payment for Medicare home health services. Through BBA, the Congress has given HCFA some new tools to improve the administration of this benefit. The administration also has recently announced a moratorium on home health agency certifications as HCFA revises the criteria for certification. The BBA included several provisions that could be used to prevent untrustworthy providers from entering the Medicare home health market. For example, BBA authorizes HHS to refuse to allow individuals or entities convicted of felonies from participating in Medicare. Also, Medicare can exclude an entity whose former owner transfers ownership to a family or household member in anticipation of, or following, an exclusion or cause for exclusion. In addition, BBA requires entities and individuals to report to HCFA their taxpayer identification numbers and the Social Security numbers of owners and managing employees. This should make easier the tracking of individuals who have been sanctioned under the Social Security Act or convicted of crimes, if they move from one provider to another. Another provision of the BBA that may prove useful in fighting fraud and abuse is the requirement that any entity seeking to be certified as a home health agency must post a surety bond of at least $50,000. This should provide at least minimal assurance that the entity has some financial and business capability. Finally, BBA authorizes HCFA to establish normative guidelines for the frequency and duration of home health services and to deny payment in cases exceeding those guidelines. One area where changes could help to control abuse in home health not directly addressed by the BBA is the survey and certification of agencies for participation in Medicare. State health departments under contract with HCFA visit agencies that wish to participate in Medicare to assess whether they meet the program's conditions of participation--a set of 12 criteria covering such things as nursing services, agency organization and governance, and medical records--thought to be indicative of an agency's ability to provide quality care. When Medicare was set up, it was not done with abusive billers and defrauders in mind. Rather, Medicare's claims system assumes that, for the most part, providers submit proper claims for services actually rendered that are medically necessary and meet Medicare requirements. For home health care, the home health agency usually develops the plan of care and is responsible for monitoring the care provided and ensuring that care is necessary and of adequate quality. In other words, the agency is responsible for managing the care it furnishes. While these functions are subject to review by Medicare's regional home health intermediaries, only a small portion of claims (about 1 percent) are reviewed, and most of those are paper reviews of the agency's records. Early this year, HCFA proposed regulations to modify the home health conditions of participation and their underlying standards. The modifications would change the emphasis of the survey and certification process from an assessment of whether an agency's internal processes are capable of ensuring quality of care toward an assessment that includes some of the outcomes of the care actually furnished. HCFA believes this change in emphasis will provide a better basis upon which to judge quality of care. HCFA is currently considering the comments received on the proposed revisions in preparation for finalizing them, but it does not yet have a firm date for their issuance. We believe that the survey and certification process could be further modified so that it would also measure agencies' compliance with their responsibilities to develop plans for, and deliver, only appropriate, necessary, covered care to beneficiaries. Such modifications could be tied to the new features that HCFA selects as it designs the home health PPS. For example, the case-mix adjuster might be designed to take into account the specific illnesses of the patients being treated along with other factors that affect the resources needed to care for patients, such as limitations in their ability to perform the activities of daily living. Agencies would have a financial incentive to exaggerate the extent of illness or limitations because doing so would increase payments. The survey teams might be able to evaluate whether the agency being surveyed had in fact correctly classified patients at the time the outcome information is reviewed. Use of state surveyors for such purposes would not be unprecedented because survey teams also assessed whether Medicare home health coverage criteria were met during Operation Restore Trust. As discussed previously, HCFA needs to design utilization review systems to ensure that, if home health agencies respond inappropriately to the incentives of PPS, such responses will be identified and corrected. HCFA should also consider as it designs such systems using the survey and certification process to measure whether home health agencies meet their utilization management responsibilities. This would help to identify abusive billers of home health services while at the same time help to ensure quality. HCFA, the moratorium is designed to stop the admission of untrustworthy providers while HCFA strengthens its requirements for entering the program. In a September 19 memorandum, HCFA clarified the provisions of the moratorium. According to the memorandum, the moratorium applies to new home health agencies and new branches of existing agencies. It will last until the requirements to strengthen the home health benefit have been put in place, which HCFA officials estimate to be in 6 months. No new federal or state surveys are to be scheduled or conducted for the purpose of certifying new home health agencies; those surveys in progress but not completed when the moratorium was announced are to be terminated; and previously scheduled surveys for new certifications are to be canceled. HCFA will, however, enter into new home health agency provider agreements if the new agency has completed the initial survey successfully, meaning that the agency has complied with Medicare's conditions of participation and has satisfied all other provider agreement requirements. HCFA said it would make rare exceptions to the certification moratorium if a home health agency provides compelling evidence demonstrating that the agency will operate in an underserved area that has no access to home care. According to a HCFA official, several actions are planned during the moratorium. HHS is expected to implement the program safeguards mandated by the BBA, such as implementing the requirement for home health agencies to post at least a $50,000 surety bond before they are certified and promulgating a rule requiring new agencies to have enough funds on hand to operate for the first 3 to 6 months. HHS is also expected to develop new regulations requiring home health agencies to provide more ownership and other business-related information and requiring agencies to reenroll every 3 years. At this point, it is difficult to say what practical effect the moratorium will have on the home health industry or the Medicare program. However, the moratorium could be useful, first, in sending a signal that the administration is serious about weeding out untrustworthy providers and, second, in establishing a milestone for issuing regulatory reforms. service and an adequate case-mix adjuster for a PPS as well as remove the effects of cost report abuse and inappropriate utilization from its databases so that those problems do not result in overstatement of PPS rates. HCFA also needs to quickly implement the new tools in the BBA so that it can keep untrustworthy providers from gaining access to the program and remove those that already have access. Moreover, HCFA needs a new utilization and quality control system designed specifically to address the new incentives under PPS. This concludes my prepared remarks, and I will be happy to answer any questions you or Members of the Subcommittee may have. Medicare Home Health Agencies: Certification Process Is Ineffective in Excluding Problem Agencies (GAO/T-HEHS-97-180, July 28, 1997). Medicare: Need to Hold Home Health Agencies More Accountable for Inappropriate Billings (GAO/HEHS-97-108, June 13, 1997). Medicare Post-Acute Care: Cost Growth and Proposals to Manage It Through Prospective Payment and Other Controls (GAO/T-HEHS-97-106, Apr. 9, 1997). Medicare: Home Health Cost Growth and Administration's Proposal for Prospective Payment (GAO/T-HEHS-97-92, Mar. 5. 1997). Medicare Post-Acute Care: Home Health and Skilled Nursing Facility Cost Growth and Proposals for Prospective Payment (GAO/T-HEHS-97-90, Mar. 4, 1997). Medicare: Home Health Utilization Expands While Program Controls Deteriorate (GAO/HEHS-96-16, Mar. 27, 1996). Medicare: Allegations Against ABC Home Health Care (GAO/OSI-95-17, July 19, 1995). Medicare: Increased Denials of Home Health Claims During 1986 and 1987 (GAO/HRD-90-14BR, Jan. 24, 1990). Medicare: Need to Strengthen Home Health Care Payment Controls and Address Unmet Needs (GAO/HRD-87-9, Dec. 2, 1986). The Elderly Should Benefit From Expanded Home Health Care but Increasing These Services Will Not Insure Cost Reductions (GAO/IPE-83-1, Dec. 7, 1982). Response to the Senate Permanent Subcommittee on Investigations' Queries on Abuses in the Home Health Care Industry (GAO/HRD-81-84, Apr. 24, 1981). Medicare Home Health Services: A Difficult Program to Control (GAO/HRD-81-155, Sept. 25, 1981). Home Health Care Services--Tighter Fiscal Controls Needed (GAO/HRD-79-17, May 15, 1979). The first copy of each GAO report and testimony is free. Additional copies are $2 each. 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GAO discussed how the Balanced Budget Act of 1997 (BBA) addressed the issues of rapid cost growth in Medicare's home health benefit, focusing on: (1) the reasons for the rapid growth of Medicare home health care costs in the 1990s; (2) the interim changes in the BBA to Medicare's current payment system; (3) issues related to implementing the BBA's requirement to establish a prospective payment system (PPS) for home health care; and (4) the status of efforts by Congress and the administration to strengthen program safeguards to combat fraud and abuse in home health services. GAO noted that: (1) changes in law and program guidelines have led to rapid growth in the number of beneficiaries using home health care and in the average number of visits per user; (2) in addition, more patients now receive home health services for longer periods of time; (3) these changes have not only resulted in accelerating cost but also marked a shift from an acute-care, short-term benefit toward a more chronic-care, longer-benefit; (4) the recently enacted BBA included a number of provisions designed to slow the growth in home health expenditures; (5) these include tightening payment limits immediately, requiring a PPS beginning in fiscal year 2000, prohibiting certain abusive billing practices, strengthening participation requirements for home health agencies, and authorizing the Secretary of Health and Human Services to develop normative guidelines for the frequency and duration of home health services; (6) all of these provisions should help control Medicare costs; (7) however, the Health Care Financing Administration (HCFA), the agency responsible for administering Medicare, has considerable discretion in implementing the law which, in turn, means the agency has much work to do within a limited time period; and (8) HCFA's actions, both in designing a PPS and in implementing enhanced program controls to assure that unscrupulous providers cannot readily game the system, will determine to large extent how successful the legislation will be in curbing past abusive billing practices and slowing the rapid growth in spending for this benefit.

USPS's financial condition has deteriorated significantly since fiscal year 2006, and its financial outlook is grim in both the short and long term. In July 2009, we added USPS's financial condition and outlook to our high- risk list because USPS was incurring billion-dollar deficits and the amount of debt it incurred was increasing as revenues declined and costs rose. USPS's financial condition has been negatively affected by decreasing mail volumes as customers have increasingly shifted to electronic communications and payment alternatives, a trend that is expected to continue. USPS reported that total mail volume decreased 3 percent in the second quarter of fiscal year 2011, while First-Class Mail declined by 7.6 percent compared with the same period last year, negatively affecting revenue as First-Class Mail is USPS's most profitable mail. Half way through fiscal year 2011, USPS reported a net loss of $2.6 billion. USPS has reported achieving some cost savings in the last 5 years--for example, it eliminated about 137,000 full- and part-time positions. However, USPS has had difficulty reducing its compensation and benefits costs and has struggled to optimize its workforce and its retail, mail processing, and delivery networks to reflect declining mail volume. USPS has relied increasingly on debt to fund its operations and has increased its net borrowing by nearly $12 billion over the last 5 years. USPS recently reported that its financial performance for the first 6 months of fiscal year 2011 was worse than expected, and that, not only will it reach its $15 billion statutory debt limit by the end of the fiscal year, it now projects a substantial cash shortfall and that it will be unable to pay all of its financial obligations. Specifically, USPS said that absent legislative change it will be forced to default on payments to the federal government, including a $5.5 billion pre-funding payment for retiree health benefits due on September 30, 2011. While USPS's financial condition continues to deteriorate, we and USPS have presented options to improve the agency's financial condition. Specifically, we have reported that Congress and USPS need to reach agreement on a package of actions to restore USPS's financial viability, which will enable USPS to align its costs with revenues, manage its growing debt, and generate sufficient funding for capital investment. Proposed legislation, including S. 353 and draft legislation expected to be introduced by Senator Carper, provide a starting point for considering key issues where congressional decisions are needed to help USPS undertake needed reforms. As we have previously reported, to address USPS's viability in the short-term, Congress should consider modifying the funding requirements for USPS's retiree health benefits in a fiscally responsible manner. For long-term stability, Congress should address constraints and legal restrictions, such as those related to closing facilities, so that USPS can take more aggressive action to reduce costs. Action is urgently needed as mail delivery is a vital part of this nation's economy. The USPS Postmaster General has also presented strategies for improving USPS's financial viability, recently stating that the agency's focus should be on its core function of delivery, growing the package business, and aggressively controlling costs and consolidating postal networks to increase efficiency. Clearly, USPS's delivery fleet is a vital component of a strategy focused on delivery. As shown in figure 1, there are three principal components of USPS's delivery fleet: about 141,000 "long-life vehicles" (LLV)--custom-built, right-hand-drive, light duty trucks with an aluminum body 16 to 23 years old, that are approaching the end of their expected 24-year operational lives; about 21,000 flex-fuel vehicles (FFV), also custom-built with right-hand drive, 9 and 10 years old, that are approaching the mid-point of their expected 24-year operational lives; and about 22,000 commercially-available, left-hand drive minivans that range in age from 2 to 13 years and have an expected operational life of 10 years. According to USPS officials, right-hand-drive vehicles are necessary for curbline delivery. In addition, USPS officials told us that the LLVs' and FFVs' standardized design minimizes training requirements, increases operational flexibility, and facilitates partnerships with parts suppliers. Moreover, LLVs and FFVs were made to withstand harsh operating conditions, resulting from an average of about 500 stops and starts per delivery route per day. As a result, the LLVs and FFVs are expected to last more than twice as long as the minivans, which were not built to withstand these operating conditions. USPS is subject to certain legislative requirements governing the federal fleet. For example, under the Energy Policy Act of 1992 (EPAct 1992), 75 percent of the light-duty vehicles that USPS acquires must be capable of using an alternative fuel such as ethanol, natural gas, propane, biodiesel, electricity, or hydrogen. Since 2000, USPS has consistently purchased delivery vehicles that can operate on gasoline or a mixture of gasoline and 85 percent ethanol (E85) to satisfy this requirement. These vehicles are known as dual-fueled vehicles. USPS officials stated that E85-capable vehicles were chosen because they were the least costly option for meeting federal fleet acquisition requirements. In addition, officials expected that E85 eventually would be widely available throughout the United States. However, according to Department of Energy (DOE) data, as of December 2009, E85 was not available at 99 percent of U.S. fueling stations. Subsequent legislation required that alternative fuel be used in all dual- fueled vehicles unless they have received a waiver from DOE. Because of E85's limited availability, USPS has sought and obtained annual waivers from DOE--for example, in fiscal year 2010, about 54 percent of its E85- capable vehicles received waivers permitting them to be operated exclusively on gasoline. The remaining 46 percent of its E85-capable vehicles were expected to operate exclusively on E85. However, USPS officials acknowledged that USPS does not always fuel these vehicles with E85 because using E85 increases operational costs. Apart from its experiences with E85-capable vehicles, USPS has a variety of limited experiences with other types of alternative fuel delivery vehicles. Collectively, these vehicles accounted for about 2 percent (3,490 vehicles) of its delivery fleet as of September 30, 2010, as shown in table 1. According to USPS officials, to date, USPS has not invested more heavily in alternative technologies in part because alternative fuel vehicles likely would result in higher estimated lifecycle costs than gasoline-fueled vehicles. This is largely because any potential fuel savings from alternative fuel vehicles would be unlikely to offset generally higher acquisition costs over the vehicles' operating lives, given that USPS's delivery vehicles on average travel about 17 miles and its LLVs use the equivalent of about 2 gallons of gasoline per day. In addition, USPS officials told us that the limited availability of alternative fuels and the high costs of installing fueling infrastructure--such as on-site charging stations--have made it difficult to elect to invest in or operate these vehicles. Finally, they noted that USPS has experienced problems obtaining technological support and parts for its alternative fuel vehicles. USPS's current approach is to sustain operations of its delivery fleet-- through continued maintenance--for the next several years, while planning how to address its longer term delivery fleet needs. Under this approach, USPS anticipates purchasing limited numbers of new, commercially available minivans. According to USPS officials, this approach was adopted in December 2005 after senior management and a Board of Governors subcommittee decided not to initiate a major fleet replacement or refurbishment. At that time, USPS estimated that it would cost $5 billion to replace about 175,000 vehicles. Planning and executing a custom-built vehicle acquisition would take 5 to 6 years from initially identifying the vehicles' specifications and negotiating with manufacturers through testing and deployment, according to USPS officials. USPS also elected not to refurbish its fleet, another option considered. According to a USPS contractor, in 2005, the agency could have delayed purchasing new vehicles for at least 15 years if it had refurbished its LLVs and FFVs (i.e., replaced nearly all parts subject to the effects of wear and aging) over a 10-year period--at a cost in 2005 of about $20,000 per vehicle--or a total of about $3.5 billion, assuming that 175,000 vehicles were refurbished. USPS officials said the agency chose to maintain its current delivery fleet rather than make a major capital investment given pending operational and financial developments and uncertainty about evolving vehicle technologies. We found that USPS's maintenance program and well-established parts supply network have enabled it to maintain its current delivery fleet while avoiding the capital costs of a major vehicle replacement or refurbishment. The USPS Office of Inspector General recently reported that this approach is operationally viable and generally cost-effective, given USPS's financial circumstances. Our analysis of a custom query of USPS's vehicle database found that delivery vehicles' direct maintenance costs averaged about $2,450 per vehicle in fiscal year 2007 and just under $2,600 per vehicle in fiscal year 2010 (in constant 2010 dollars). However, these direct maintenance costs are understated, in part because, according to USPS data, about 6 percent of total maintenance costs--all due to maintenance performed by contractors--were not entered into its database. USPS's approach has trade-offs, including relatively high costs to maintain some delivery vehicles. Our analysis showed that while about 77 percent of its delivery vehicles incurred less than $3,500 in direct annual maintenance costs in fiscal year 2010, about 3 percent (5,349) of these vehicles required more than $7,000--and 662 vehicles required more than $10,500--in direct annual maintenance costs, or over one-third the $31,000 per vehicle replacement cost USPS currently estimates. USPS officials stated that in most cases, they repair an LLV or FFV rather than replace it with a minivan because of the continuing need for right-hand- drive vehicles. One reason that some vehicles are incurring high direct maintenance costs is that USPS has replaced--at a minimum--about 4,500 LLV frames in fiscal years 2008 through 2010 because of severe corrosion, at a cost of about $5,000 each. None of the fleet managers for Fed-Ex Express, United Parcel Service, or other companies we spoke with have replaced their vehicles' frames, and some suggested that the need to do so is a key indication that it is time to replace--not repair--a vehicle. Another trade off of its current strategy is that USPS is increasingly incurring costs for unscheduled maintenance because of breakdowns. USPS's goal is to ensure that no more than 20 percent of its total annual maintenance costs are for unscheduled maintenance. However, in fiscal year 2010, at least 31 percent of its vehicle maintenance costs were for unscheduled maintenance, 11 percentage points over its 20 percent goal. Unscheduled maintenance can result in delays in mail delivery and operational costs, such as overtime expenses. USPS employees at a majority of the eight vehicle maintenance facilities and some post offices we visited told us that they believe delivery vehicles can continue to deliver mail without major operational interruptions for at least several more years. At the same time, we identified some instances of maintenance problems during our site visits (our report being released today contains photographs and further discussion of these problems). For example, officials at a Minnesota vehicle maintenance facility told us that they are not following USPS's requirements for replacing frames whose thickness in key spots indicates weakness because they do not have the resources to do so. Instead, they said, facility personnel replace frames only when the frames have one or more holes through the metal. In addition, when we visited a vehicle maintenance facility in New York state, technicians were replacing two severely corroded LLV frames with similar holes. The manager of this facility informed us that frames in this condition should have been replaced during a previous preventive maintenance inspection. As discussed, USPS's financial condition has declined substantially, and although USPS issued a 10-year action plan in March 2010 for improving its financial viability, the plan did not address its fleet of delivery vehicles. USPS has not analyzed how operational changes proposed in its 10-year plan, including a potential shift in delivery from 6 to 5 days a week, would affect its delivery fleet needs, nor has it examined the consequences of its decision to delay the fleet's replacement or refurbishment. In addition, it has not developed a fleet financing strategy. During our review, USPS officials told us that the agency is in the early stages of developing a proposal for addressing its delivery fleet needs. These officials stated that the proposal will likely explore alternatives, including maintaining the current fleet, refurbishing the LLVs and FFVs, or, possibly, undertaking a major acquisition of new vehicles. Furthermore, USPS officials stated that the proposal will discuss strategies for incorporating additional alternative fuel capabilities into its fleet. USPS expects to present its proposal to its Capital Investment Committee later this fiscal year. USPS officials said that the agency intends to examine ways to comply with EPAct 1992's acquisition requirements in its next large-scale acquisition of delivery vehicles, but noted that life-cycle costs are significantly higher for nearly all currently available alternative fuel vehicles than for gasoline-powered vehicles. Consequently, these officials told us a large-scale acquisition of alternative fuel vehicles (other than E85-capable vehicles) is not likely to be financially viable. USPS officials stated that, in their view, the best way to meet national sustainability requirements for reduced emissions without incurring significant costs may be to invest in highly fuel-efficient gasoline-powered vehicles. Such an outcome could be possible given increased legislative flexibility in the definition of what constitutes an alternative fuel vehicle. Specifically, as a result of the National Defense Authorization Act of 2008, any vehicle determined by the Environmental Protection Agency (EPA) to be a low- greenhouse-gas-emitting vehicle in locations that qualify for a DOE waiver would be considered an alternative fuel vehicle. However, because EPA evaluates only commercially available vehicles, at present, there are no low-greenhouse-gas-emitting right-hand-drive vehicles available that have been determined to meet EPAct 1992's fleet acquisition requirements for light-duty vehicles. Consequently, if USPS decides to pursue such a vehicle in its next acquisition of custom-built delivery vehicles, it would need to work with vehicle manufacturers, EPA, and DOE. USPS's financial condition poses a significant barrier to its ability to fund a major acquisition of its delivery fleet. Recently, USPS estimated that it would cost about $5.8 billion to replace about 185,000 delivery vehicles with new gasoline-powered custom-built vehicles, at about $31,000 per vehicle (in 2011 dollars). Further, officials from USPS, DOE, and an environmental organization, and operators of private fleets see little potential to finance a fleet replacement through grants or partnerships. A primary barrier to a joint procurement is USPS's need for customized, right-hand-drive delivery vehicles (its competitors typically use larger vehicles that are not right-hand-drive). USPS and DOE officials also saw little likelihood that USPS could help finance a major delivery fleet acquisition through an energy savings performance contract, in which a federal agency enters into a long-term contract with a private energy company and shares energy-related cost savings. Given the low annual mileage of USPS's delivery fleet, USPS and DOE officials stated that it is unlikely that the fuel savings generated from a more efficient fleet (whether consisting of gasoline-only vehicles or alternative fuel vehicles) would be sufficient, compared with the acquisition cost of the vehicles, to interest a private investor. If Congress and USPS reach agreement on a package of actions to move USPS toward financial viability, depending on the specific actions adopted, USPS's follow-up, and the results, such an agreement could enhance USPS's ability to invest in new delivery vehicles. While USPS's efforts to maintain its current delivery fleet have worked thus far, the time soon will come when the cost and operational consequences of this approach will not allow further delays. When that time comes, USPS will need to know how it can best comply with federal requirements for acquiring alternative fuel vehicles while also meeting its operational requirements. However, until USPS defines its strategy for a major capital investment for its delivery vehicles, neither USPS nor Congress has sufficient information to fully consider its options. Consequently, USPS must develop a comprehensive strategy for dealing with this inevitability. In the report that this testimony is based on, we recommend that USPS develop a strategy and timeline for addressing its delivery fleet needs. Specifically, we recommend that this strategy address such issues as the effects of USPS's proposed change from 6- to 5-day delivery and consolidation of its facilities, as well as the effects of continuing changes in its customers' use of the mail on future delivery fleet requirements, along with an analysis of how it can best meet federal fleet requirements, given its budget constraints. USPS agreed with our findings and recommendation. USPS stated that it is developing a strategy to address the immediate and long-term needs of its delivery fleet, and that it plans to complete the strategy and associated timeline by the end of December 2011. Chairman Carper, Ranking Member Brown, and Members of the Subcommittee, this concludes my prepared statement. I would be pleased to answer any questions that you have. For further information about this statement, please contact Phillip Herr at (202) 512-2834 or [email protected]. Individuals who made key contributions to this statement include Kathleen Turner (Assistant Director), Teresa Anderson, Joshua Bartzen, Bess Eisenstadt, Laura Erion, Alexander Lawrence, Margaret McDavid, Joshua Ormond, Robert Owens, Matthew Rosenberg, Kelly Rubin, Karla Springer, Crystal Wesco, and Alwynne Wilbur. 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 United States Postal Service (USPS) is in financial crisis. It also has the world's largest civilian fleet, with many of its delivery vehicles reaching the end of their expected 24- year operational lives. USPS is subject to certain legislative requirements governing the federal fleet, including a requirement that 75 percent of USPS's vehicle acquisitions be capable of operating on an alternative fuel other than gasoline. This testimony addresses (1) USPS's financial condition; (2) USPS's delivery fleet profile, including how USPS has responded to alternative fuel vehicle requirements and its experiences with these vehicles; (3) trade-offs of USPS's approach for addressing its delivery fleet needs; and (4) options to fund a major acquisition of delivery vehicles. This testimony is primarily based on GAO-11-386 , which is being released today. For that report, GAO analyzed USPS data, visited USPS facilities, and interviewed USPS and other officials. GAO recommended in that report that USPS should develop a strategy for addressing its delivery fleet needs that considers the effects of likely operational changes, legislative fleet requirements, and other factors. USPS agreed with the recommendation. For this testimony, GAO also drew upon past and ongoing work on USPS's financial condition and updated USPS financial information. USPS's financial condition continues to deteriorate. For the first 6 months of fiscal year 2011, USPS reported a net loss of $2.6 billion--worse than it expected--and that, absent legislative change, it will have to default on payments to the government, including a $5.5 billion payment for its retiree health benefits. GAO has reported that Congress and USPS need to reach agreement on a package of actions to move USPS toward financial viability. USPS's delivery fleet is largely composed of custom-built, right-hand-drive vehicles designed to last for 24 years, including about 141,000 gasolinepowered vehicles (16 to 23 years old) and 21,000 flex-fuel vehicles capable of running on gasoline or 85-percent ethanol (E85) (about 10 years old). Its flexfuel vehicles and many of its 22,000 left-hand-drive minivans, which are also capable of running on E85, were purchased to comply with the 75 percent acquisition requirement for alternative fuel vehicles. Delivery vehicles travel about 17 miles and use the equivalent of about 2 gallons of gasoline on average per day. USPS has a variety of limited experiences with other alternative fuel vehicles, such as compressed natural gas and plug-in electric vehicles, most of which have higher life-cycle costs than gasoline vehicles. USPS's approach for addressing its delivery fleet needs is to maintain its current fleet until it determines how to address its longer term needs. USPS has incurred small increases in direct maintenance costs over the last 4 years, which were about $2,600 per vehicle in fiscal year 2010. However, it is increasingly incurring costs for unscheduled maintenance because of breakdowns, which can disrupt operations and increase costs. In fiscal year 2010, at least 31 percent of USPS's vehicle maintenance costs were for unscheduled maintenance, 11 percentage points over USPS's 20 percent goal. USPS's financial challenges limit options to fund a major delivery vehicle replacement or refurbishment, estimated to cost $5.8 billion and (in 2005) $3.5 billion, respectively. USPS and other federal and nonfederal officials see little potential to finance a fleet replacement through grants or partnerships. If Congress and USPS reach agreement on a package of actions to move USPS toward financial viability, such an agreement could potentially enhance USPS's ability to invest in new delivery vehicles.

To better focus its munitions cleanup activities under the Defense Environmental Restoration Program, DOD established the Military Munitions Response program in September 2001. The objectives of the program include compiling a comprehensive inventory of military munitions sites, developing a prioritization protocol for sequencing work at these sites, and establishing program goals and performance measures to evaluate progress. In December 2001, shortly after DOD established the program, the Congress passed the National Defense Authorization Act for Fiscal Year 2002, which among other things, required DOD to develop an initial inventory of sites that are known or suspected to contain military munitions by May 31, 2003, and to provide annual updates thereafter. DOD provides these updates as part of its Defense Environmental Restoration Program Annual Report to Congress. To clean up potentially contaminated sites, DOD generally follows the process established for cleanup actions under CERCLA, which includes the following phases and activities: Preliminary Assessment--Determine whether a potential military munitions hazard is present and whether further action is needed. Site Investigation--Inspect the site and search historical records to confirm the presence, extent, and source(s) of hazards. Remedial Investigation/Feasibility Study or Engineering Evaluation/Cost Analysis--Determine the nature and extent of contamination; determine whether cleanup action is needed and, if so, select alternative cleanup approaches. These could include removing the military munitions, limiting public contact with the site through signs and fences, or determining that no further action is warranted. Remedial Design/Remedial Action--Design the remedy and perform the cleanup or other response. Long-Term Monitoring--Periodically review the remedy in place to ensure its continued effectiveness, including checking for unexploded ordnance and public education. For sites thought to be formerly used defense sites, the Corps also performs an initial evaluation prior to the process above. In this initial evaluation, called a preliminary assessment of eligibility, the Corps determines if the property is a formerly used defense site. The Corps makes this determination based on whether there are records showing that DOD formerly owned, leased, possessed, operated, or otherwise controlled the property and whether hazards from DOD's use are potentially present. If eligible, the site then follows the CERCLA assessment and cleanup process discussed earlier. When all of these steps have been completed for a given site and long-term monitoring is under way, or it has been determined that no cleanup action is needed, the services and the Corps consider the site to be "response complete." While DOD has identified 2,307 potentially contaminated sites as of September 2002, the department continues to identify additional sites, and it is not likely to have a firm inventory for several years (see table 1 for the distribution of these sites by service). Of the identified sites, DOD determined that 362 sites require no further study or cleanup action because it found little or no evidence of military munitions. For 1,387 sites, DOD either has not begun or not completed its initial evaluation, or has determined that further study is needed. DOD has completed an assessment of 558 sites, finding that 475 of these required no cleanup action. The remaining 83 sites require some cleanup action, of which DOD has completed 23. DOD had identified 2,307 sites potentially contaminated with military munitions, as of September 30, 2002, and it continues to identify additional sites. (Fig. 1 shows the distribution of these sites by state.) DOD officials acknowledge that they will not have a firm inventory for several years. For example, as of September 30, 2002, the Army had not completed a detailed inventory of closed ranges at 86 percent of active installations; the 105 sites identified by the Army represented sites on only 14 percent of the Army's installations. The Army is working to identify sites on the remaining installations and plans to have 40 percent of its installations accounted for by the next Defense Environmental Restoration Program Annual Report to Congress in spring 2004. Similarly, the Corps recently identified 75 additional sites to be included in the inventory as a result of its effort to reevaluate sites previously determined not to need further action after the initial evaluation. Because not all of the sites have been identified, DOD has only a preliminary idea of the extent of cleanup that will be needed. To help complete the identification process, DOD has developed a Web site that stakeholders, such as states, tribes, and federal regulators, can use to suggest additions and revisions to the inventory. DOD plans to update the inventory in its future Defense Environmental Response Program Annual Report to Congress using, in part, the information collected from this Web site. Of the 2,307 sites identified, DOD has determined, based on an initial evaluation, that 362 do not require any further DOD action (see fig. 2). However, these 362 sites are formerly used defense sites, and the Corps' evaluation of these sites was less comprehensive than other evaluations conducted by DOD under the CERCLA process. In making its determinations, the Corps conducted a preliminary assessment of eligibility and determined that the potential for military munitions hazard was not present. As a result of this determination, the sites were not evaluated further. The Corps is in the process of reviewing these determinations with local stakeholders to ensure that there was a sound basis for the original determination. It has recently decided that some of these sites need to be reassessed to determine if cleanup is needed. Of the 1,945 sites that required further action, DOD has either not begun or has not completed its study, or has determined that further study is needed, for 1,387 sites (see fig. 3). For example, 241 Air Force and 105 Army sites at closed ranges on active installations have not been evaluated. For other sites, primarily formerly used defense sites, DOD has completed its initial evaluation and determined that further investigation is needed. DOD has completed its assessment of 558 sites, nearly all of which are ranges on formerly used defense sites or closing installations, and determined that no cleanup action was needed for 475; the remaining 83 sites required some level of cleanup action. Of the 83 sites that required cleanup action, 60 have cleanup action planned or under way and 23 are complete. Actions taken at these 23 sites have been varied and include surface and subsurface removal of munitions, and institutional controls, such as the posting of warning signs or educational programs. See figure 4 for examples of cleanup actions at Military Munitions Response program sites. In DOD's Fiscal Year 2002 Defense Environmental Restoration Program Annual Report to Congress, DOD identified several elements integral to the success of the Military Munitions Response program: compiling a comprehensive inventory of sites; developing a new procedure to assess risk and prioritize sites; ensuring proper funding for accurate planning and program execution; and establishing program goals and performance measures. While DOD has established the basic framework to address these elements, DOD's plan is lacking in three key respects. First, essential data for DOD's plan may take years to develop. Second, DOD's plan is contingent upon preliminary cost estimates that may change significantly and a reallocation of funds that may not be available. Finally, DOD's plan lacks specific goals and performance measures to track progress. DOD's inventory of potentially contaminated sites serves as the basis for other elements of its plan, yet this inventory is incomplete. DOD's inventory of 2,307 sites includes only those identified through September 30, 2002. As previously discussed, according to DOD officials, this inventory is not final; and DOD has not set a deadline to complete it. According to DOD, most of the ranges on formerly used defense sites and on military installations that are being closed have been identified and are being assessed or cleanup action is under way. The ranges yet to be identified are primarily located on active installations. For example, the Army, as of September 30, 2002, had completed a detailed inventory of potentially contaminated sites on only 14 percent of its active installations. Because the inventory serves as the basis for other elements of the plan, such as budget development and establishing program goals, most sites must first be identified in order for DOD to have a reasonable picture of the magnitude of the challenge ahead and to plan accordingly. Furthermore, DOD intends to use a new procedure to reassess the relative risk and priority for 1,387 sites needing further study and any new sites identified as part of the continuing inventory effort, but DOD is not scheduled to complete these reassessments until 2012. DOD recently developed this procedure for assigning each site in the inventory a priority level for cleanup action, based on the potential risk of exposure resulting from past munitions-related activities. Under this procedure, DOD plans to reevaluate the 1,387 sites for three potential hazard types: (1) explosive hazards posed by unexploded ordnance and discarded military munitions, (2) hazards associated with the effects of chemical warfare material, and (3) chronic health and environmental hazards posed by munitions constituents. Once assessed, each site's relative risk-based priority will be the primary factor determining future cleanup order. DOD plans to require assessment of each site on the inventory for at least one of these hazard types by May 31, 2007, and for all three hazard types by May 31, 2012. Until all three hazard types are fully assessed, DOD cannot be assured that it is using its limited resources to clean up those sites that pose the greatest risk to safety, human health, and the environment. DOD's plan to identify and address military munitions sites relies on preliminary cost estimates that were developed using incomplete information. The majority of the site estimates were developed using a cost-estimating tool that incorporates variables, such as the affected acreage; types, quantity, and location of munitions; and future land use. These variables can have a significant impact on cost, according to DOD. However, detailed site-specific information was not available for all sites. For example, as mentioned earlier, 105 Army and 241 Air Force sites at closed ranges on active installations have not had an initial evaluation. As a result, the Air Force used estimated, not actual, acreage figures, including assumptions regarding the amount of acreage known or suspected of containing military munitions when preparing its cost estimates. Because changes in acreage can greatly impact the final cost of site assessment and cleanup action, the estimates produced for these sites are likely to change when estimates based on more complete data or the actual cost figures are known. The following examples illustrate how cost estimates can change during the life of the cleanup as better information becomes available: Camp Maxey was a 41,128-acre Army post in Texas used from 1942 to 1945 for training infantry in live fire of weapons including pistols, rifles, machine guns, mortars, bazookas, and antitank guns. The Corps confirmed the presence of unexploded ordnance, and in 2000, estimated the cleanup cost for the land at $45 million. In DOD's Fiscal Year 2002 Defense Environmental Restoration Program Annual Report to Congress, the estimated total cost of cleanup had grown to $130 million. A June 2003 cost estimate showed a decrease in total cost to about $73 million, but still 62 percent more than the original cost estimate in 2000. The main factors behind these shifting cost estimates, according to the project manager, were changes in the acreage requiring underground removal of ordnance and changes in the amount of ordnance found. Fort McClellan, Alabama, was among the installations recommended for closure under DOD's base realignment and closure effort in 1995. This site had been used since the Spanish American War (1898), including as a World War I and II training range upon which grenades, mortars, and antiaircraft guns, were used. An April 2002 cost estimate prepared for one site on Fort McClellan requiring cleanup showed the anticipated cost of clearing the land of munitions as $11,390,250. A subsequent cost estimate prepared in May 2003, showed the cost of clearing this site at $22,562,200. According to the Army, the increase in estimated costs reflects a change in the final acreage recommended for clearance and the extent to which buried munitions would be searched for and removed. Moreover, until DOD and stakeholders agree upon a cleanup action, it is often difficult for them to predict the extent of the cleanup action required and cost estimates can change because of the cleanup action implemented at the site. For example, at the former Indian Rocks Range in Pinellas County, Florida, the Corps identified 178 acres that were used as an air-to- ground and antiaircraft gunnery range impact area from 1943 to 1947. Munitions used on this shoreline site included bullets, aircraft rockets, and small practice bombs. Much of the land had been developed, limiting the Corps ability to pursue the alternative of searching for and removing buried munitions. In 1995, the Corps analyzed a number of alternatives to address munitions contamination at the site and developed cost estimates for these alternatives. However, because the development was largely composed of hotels, condominiums, and single-family residences, the Corps chose the alternative of conducting a community education program. The total cost of this alternative was $21,219. If the Corps had decided to search for and remove the remaining munitions at this site, the cost could have approached $3 million, according to the prepared cost analysis. Furthermore, at an annual funding level of approximately $106 million (the average amount budgeted or spent annually from fiscal year 2002 to fiscal year 2004), cleanup at the remaining munitions sites in DOD's current inventory could take from 75 to 330 years to complete. To reduce this timeline, DOD expects to use funds currently designated for hazardous, toxic, and radioactive waste cleanup after these cleanups are complete. However, these other cleanup efforts are not on schedule in all of the services and the Corps. For example, between fiscal years 2001 and 2002, the schedule to complete hazardous substance cleanups at formerly used defense sites slipped by more than 6 years. As a result, anticipated funds from completing hazardous substance cleanups at these sites may not become available to clean up munitions sites until 2021 or later. This delay is significant because, as of September 30, 2002, formerly used defense sites account for over 85 percent of DOD's total anticipated costs to complete munitions cleanup, yet the Corps receives about 66 percent of the total munitions cleanup funds. Delays in the availability of anticipated funding from hazardous, toxic, and radioactive waste sites could greatly impair DOD's ability to accurately plan for and make progress in cleaning up Military Munitions Response sites. DOD has yet to establish specific program goals and performance measures in its plan. Specifically, DOD has yet to identify interim milestones and service-specific targets that will help it achieve overall program objectives. In September 2003, 2 years after the Military Munitions Response program was initiated, DOD established a workgroup tasked with recommending overall goals and measures for the program, near-term goals and measures to support its budgeting cycle for fiscal years 2006 to 2011, and a program completion date goal. DOD has asked the workgroup to accomplish these objectives by the end of calendar year 2003. According to DOD, these goals and measures, when developed, should help DOD track the progress of sites through the cleanup phases, and ensure that DOD responds to the sites with the greatest risk first. While it is important for DOD to establish goals and measures that will track overall program progress and ensure that the riskiest sites are assessed and cleaned up first, DOD will not have the information it needs to do this until 2012. As we discussed earlier, because DOD plans to reassess potentially contaminated sites using a new risk-based prioritization procedure, until these reassessments are complete, DOD will not have complete information on which of the sites pose the greatest risk. Consequently, goals and measures established in 2003 will be of limited use and may not reflect DOD's true priorities. Moreover, according to DOD, the program goals and measures to be established by the workgroup will be agencywide, and not service-specific, although it may establish interim goals for the services and Corps. However, DOD has not yet decided what these goals will be based on, such as relative risk levels or cleanup phases. In the absence of service-specific goals, each service has implemented the program with a different level of effort. For example, the Air Force has not budgeted any funds to assess and clean up munitions sites, nor do they plan to do so through fiscal year 2004. As mentioned before, the Air Force also has not conducted initial evaluations on any of its 241 sites and has little site-specific information from which to create a reliable cost estimate. In contrast, the Army has undertaken a comprehensive inventory of ranges that will result in detailed site information, such as acreage and the types, quantity, and location of munitions, that can be used to, among other things, create more robust cost estimates. The Army has completed this comprehensive inventory on 14 percent of its installations as of September 2002, and has set a goal to complete this effort by December 2003. This uneven effort in implementing the Military Munitions Response program could continue through various program phases, such as preliminary assessments and site investigations, making it difficult for DOD to assure that each of the services and the Corps are making progress in cleaning up their potentially contaminated sites and achieving the overall goals of the program. DOD has made limited progress in identifying, assessing, and cleaning up sites known or suspected to contain military munitions. Accomplishing this long and arduous task in a timely manner that best protects public safety, human health, and the environment will require a comprehensive approach that includes effective planning and budgeting. However, DOD lacks the data needed--such as a complete inventory, up-to-date prioritization, and reliable cost estimates--to establish a comprehensive approach. Without such an approach for identifying, assessing, and cleaning up potentially contaminated sites, DOD will be hampered in its efforts to achieve the program's objectives. To ensure that DOD has a comprehensive approach for identifying, assessing, and cleaning up military munitions at potentially contaminated sites, we recommend that the Secretary of Defense revise DOD's plan to establish deadlines to complete the identification process and initial evaluations so that it knows the universe of sites that needs to be assessed, prioritized, and cleaned up; reassess the timetable proposed for completing its reevaluation of sites using the new risk assessment procedures so that it can more timely establish the order in which sites should be assessed and cleaned up, thereby focusing on the riskiest sites first; and establish interim goals for cleanup phases for the services and Corps to target. In addition, after DOD has revised its comprehensive plan, we recommend that it work with the Congress to develop realistic budget proposals that will allow DOD to complete cleanup activities on potentially contaminated sites in a timely manner. We provided DOD with a draft of this report for review and comment. In its comments, DOD concurred with our recommendation to work with the Congress to develop realistic budget proposals that will allow it to complete cleanup activities on potentially contaminated sites in a timely manner. DOD partially concurred with our recommendation to establish deadlines to complete the identification process and initial evaluations so that it knows the universe of sites. DOD stated that the military services and the Corps have been working, and will continue to work, with stakeholders to identify additional sites and add these sites to the inventory as appropriate. DOD also stated that it believes most of the remaining sites to be identified are located on active installations still under DOD control. While we have clarified this point in the report, we note that the number of formerly used defense sites identified has increased by about 75 sites since the current inventory was completed and an unknown but possibly significant number of sites may be added as the Army completes identification of sites on 86 percent of its installations. These sites and many others still need to undergo initial evaluations. Consequently, we continue to believe that it is important for DOD to establish deadlines to complete the identification and initial evaluations for all of the sites in its inventory in order to establish a reasonable approximation of the future workload it faces. DOD also partially concurred with our recommendation to reassess the timetable proposed for completing the reevaluation of sites using the new risk assessment procedure. DOD stated that the military services and the Corps would need sufficient time and resources to complete each risk assessment. However, DOD stated that it had recently established 2010 as the goal for completing the prioritization of sites, instead of 2012 which was the original goal set forth in the proposed regulation. While we agree that this is a step in the right direction, DOD should continue to look for other opportunities to accelerate these inspections and the prioritization of sites to help ensure that resources are being targeted toward the riskiest sites first. Finally, DOD partially concurred with our recommendation to establish interim goals for cleanup phases for the services and the Corps. DOD stated that it has established interim goals of completing all preliminary assessments by 2007 and all site inspections by 2010, and that these goals apply to all military components, thereby eliminating the need for separate service-specific goals. However, DOD noted that it is working with each military service to establish additional goals and measures to gauge progress. While we are encouraged by DOD's efforts in this area, we believe that service-specific goals and measures, as they apply to the cleanup phases, will be essential for DOD to ensure that each of the services and the Corps are making progress in cleaning up potentially contaminated sites and achieving the overall goals of the program. In addition to its written comments on our draft report, DOD also provided a number of technical comments and clarifications, which we have incorporated in this report as appropriate. DOD's written comments appear in appendix III. As agreed with your office, unless you publicly announce the contents of this report earlier, we plan no further distribution until 30 days from the report date. At that time, we will send copies of this report to the appropriate congressional committees; the Secretary of Defense; Director, Office of Management and Budget; and other interested parties. 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 staffs have any questions, please call me or Edward Zadjura at (202) 512-3841. Key contributors to this report are listed in appendix IV. Military munitions can pose risks to public safety, human health, and the environment. In terms of the explosive hazard, unexploded ordnance poses an immediate safety risk of physical injury to those who encounter it. Military munitions may also pose a health and environmental risk because their use and disposal may release constituents that may contaminate soil, groundwater, and surface water. Ranges contaminated with military munitions, especially those located in ecologically sensitive wetlands and floodplains, may have soil, groundwater, and surface water contamination from any of the over 200 chemical munitions constituents that are associated with the ordnance and their usage. When exposed to some of these constituents, humans potentially face long-term health problems, such as cancer and damage to heart, liver, and kidneys. Of these constituents, there are 20 that are of greatest concern due to their widespread use and potential environmental impact. Table 2 contains a listing of these munitions constituents, and table 3 describes some of the potential health effects of five of them. Trinitrotoluene (TNT) 1,3-Dintrobenzene Nitrobenzene 2,4-Dinitrotoluene 2-Amino-4,6-Dinitrotoluene 2-Nitrotoluene 2,6-Dinitrotoluene 4-Amino-2,6-Dinitrotoluene 3-Nitrotoluene Octahydro-1,3,5,7-tetranitro-1,3,5,7-tetrazocine (HMX) 2,4-Diamino-6-nitrotoluene 4-Nitrotoluene Hexahydro-1,3,5-trinitro-1,3,5-triazine (RDX) 2,6-Diamino-4-nitrotoluene Methylnitrite Perchlorate 1,2,3-Propanetriol trinitrate (Nitroglycerine) Pentaerythritoltetranitrate (PETN) 1,3,5-Trinitrobenzene N,2,4,6-Tetranitro-N-methylaniline (Tetryl) (White Phosphorus) While many of these constituents have been an environmental concern to the Department of Defense (DOD) for more than 20 years, the current understanding of the causes, distribution, and potential impact of constituent releases into the environment remains limited. The nature of these impacts, and whether they pose an unacceptable risk to human health and the environment, depend upon the dose, duration, and pathway of exposure, as well as the sensitivity of the exposed populations. However, the link between such constituents and any potential health effects is not always clear and continues to be studied. The objectives of our review were to evaluate (1) DOD's progress in implementing its program to identify, assess, and clean up sites containing military munitions and (2) DOD's plans to clean up remaining sites in the future. To evaluate DOD's progress in identifying, assessing, and cleaning up military munitions sites, we analyzed data provided to us by DOD's Office of the Deputy Undersecretary of Defense (Installations and Environment) Cleanup Office from its database for sites identified under the Military Munitions Response program. This information includes the status of studies or cleanup actions, as well as cost estimates. The data are complete as of September 30, 2002, DOD's most recent reporting cycle, and were used to develop DOD's Fiscal Year 2002 Defense Environmental Restoration Program Annual Report to Congress. We also analyzed additional data on the status of studies or cleanup actions provided to us by the Army Corps of Engineers (the Corps) from its database of formerly used defense sites. We assessed the reliability of relevant fields in these databases by electronically testing for obvious errors in accuracy and completeness, reviewing information about the data and the system that produced them, and interviewing agency officials knowledgeable about the data. When we found inconsistencies, we worked with DOD and military service officials to correct the inconsistencies before conducting our analyses. We determined that the data needed for our review were sufficiently reliable for the purposes of our report. We also reviewed 38 of 75 project files at seven Corps districts where, according to DOD's database, site cleanup action is either complete or under way. (See table 4 for a listing of these districts). We selected these districts based on the number of sites where cleanup was completed or under way and the estimated cost to complete cleanup, with some consideration given for geographic distribution. These files represented 52 percent of the 23 sites with a completed cleanup action and 50 percent of the 52 sites with a cleanup action under way. We used our file reviews to develop case example of changes in estimated costs to complete cleanup over time and cleanup actions taken. These case examples are for illustration only. To evaluate DOD's plans for addressing the remaining sites, we analyzed the plans, as well as the assumptions upon which those plans are based, including cost and projected completion dates. In addition, we reviewed policies and program guidance, analyzed financial data, and interviewed program managers in DOD and the military services and the Corps. We conducted our work between November 2002 and October 2003 in accordance with generally accepted government auditing standards. In addition to those named above, Jack Burriesci, Elizabeth Erdmann, Sherry McDonald, and Matthew Reinhart made key contributions to this report. Also contributing to this report were Cynthia Norris, Rebecca Shea, and Ray Wessmiller. 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. 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Over 15 million acres in the United States are suspected of being, or known to be, contaminated with military munitions. These sites include ranges on closing military installations, closed ranges on active installations, and formerly used defense sites. Under the Defense Environmental Restoration Program, established in 1986, the Department of Defense (DOD) must identify, assess, and clean up military munitions contamination at these sites. DOD estimates these activities will cost from $8 billion to $35 billion. Because of the magnitude of DOD's cleanup effort, both in terms of cost and affected acreage, as well as the significant public safety, health, and environmental risks that military munitions may pose, The Ranking Minority Member of the House Committee on Energy and Commerce asked us to evaluate (1) DOD's progress in implementing its program to identify, assess, and clean up military munitions sites and (2) DOD's plans to clean up remaining sites in the future. DOD has made limited progress in its program to identify, assess, and clean up sites that may be contaminated with military munitions. While DOD had identified 2,307 potentially contaminated sites as of September 2002, DOD officials said that they continue to identify additional sites and are not likely to have a firm inventory for several years. Of the identified sites, DOD had initially determined that 362 sites required no further study or cleanup action because it found little or no evidence of military munitions. For 1,387 sites, DOD either has not begun or not completed its initial evaluation or determined that further study is needed. DOD has completed its assessment of 558 sites, finding that 475 of these required no cleanup action. The remaining 83 sites required some cleanup action, of which DOD has completed 23. DOD does not yet have a complete and viable plan for cleaning up military munitions at remaining potentially contaminated sites. DOD's plan is lacking in several respects. Essential data for DOD's plan may take years to develop. Not all the potential sites have been identified, and DOD has set no deadline for doing so. Also, DOD intends to use a new procedure to assign a relative priority for the remaining 1,387 sites, but it will not complete the reassessments until 2012. Until these are done, DOD cannot be assured that it is using its limited resources to clean up the riskiest sites first. DOD's plan relies on preliminary cost estimates that can change greatly and the reallocation of funds that may not be available. For example, the Air Force used estimated, not actual, acreage to create its cost estimates, limiting the estimate's reliability and DOD's ability to plan and budget cleanup for these sites. Also, DOD expects additional funds will become available for munitions cleanup as other DOD hazardous waste cleanup efforts are completed. However, some of these efforts are behind schedule; therefore, funds may not become available as anticipated. DOD's plan does not contain goals or measures for site assessment and cleanup. DOD recently established a working group tasked with developing agencywide program goals and performance measures, but not service-specific targets, limiting DOD's ability to ensure that the services are making progress in cleaning the potentially contaminated sites and achieving the overall goals of the program as planned.

The administration launched NPR in March 1993, when President Clinton announced a 6-month review of the federal government to be led by Vice President Gore. The first NPR report was released in September 1993 and made recommendations intended to make the government "work better and cost less." The first NPR phase, called NPR I, included recommendations to reinvent individual agencies' programs and organizations. It also included governmentwide recommendations for (1) reducing the size of the federal bureaucracy, (2) reducing procurement costs through streamlining, (3) reengineering processes through the better use of information technology, and (4) reducing administrative costs. The estimates for NPR I savings covered fiscal years 1994 through 1999. Vice President Gore launched the second NPR phase (called NPR II) in December 1994 and reported on this phase's savings estimates in September 1995.According to NPR, this second phase expanded the agenda for governmental reform. NPR II efforts focused on identifying additional programs that could be reinvented, terminated, or privatized, as well as on reinventing the federal regulatory process. The estimates for NPR II savings covered fiscal years 1996 through 2000. As shown in table I, NPR claimed estimated savings of $82.2 billion from NPR I recommendations. NPR similarly reported that $29.6 billion had been "locked into place" from program changes in individual agencies under NPR II. In addition to the $111.8 billion NPR claimed from the NPR I and II recommendations, NPR claimed $24.9 billion in estimated savings based on reinvention principles. These additional claimed savings included, for example, $23.1 billion from the Federal Communications Commission's auctions of wireless licenses. This $24.9 billion brings the total amount of reinvention savings claimed by NPR to about $137 billion. This $137 billion savings figure is the one NPR most commonly cites as the savings it has achieved. NPR relied on OMB to estimate the savings it claimed from its NPR I and II recommendations. OMB's program examiners were responsible for developing the estimates in their role as focal points for all matters pertaining to their specific assignment area. One of the examiners' major duties is to oversee the formulation and execution of the budget process. They are also expected to perform legislative, economic, policy, program, organizational, and management analyses. OMB made the initial estimates for the 1993 and 1995 NPR reports and updated its database on the savings claimed in the summers of 1996 and 1997. These updates, according to an OMB official, were primarily to ensure that all the estimates for recommendations that NPR considered implemented were included in the total amount of savings claimed. To describe and assess how OMB estimated the savings from NPR, we focused on three agencies (USDA, DOE, and NASA), where relatively large savings were claimed and that provided a variety of types of actions taken. At each agency, we selected two recommendations with claims of at least $700 million in savings each. The six recommendations we reviewed accounted for $10.45 billion of the $14.7 billion claimed from changes in individual agencies under NPR I and $19.17 billion of the $29.6 billion claimed from NPR II savings. Overall, the claimed savings from the recommendations we reviewed accounted for over two-thirds of the $44.3 billion in savings claimed from NPR's recommendations to individual agencies and 22 percent of the total amount of NPR's savings claims. Following is a listing of the six recommendations we reviewed and the estimated savings, in millions of dollars, that NPR claimed for each of those recommendations. (See apps. I through VI for detailed information on each of the recommendations.) reorganize USDA to better accomplish its mission, streamline its field structure, and improve service to its customers ($770 million); end USDA's wool and mohair subsidy ($702 million); redirect DOE laboratories to post-Cold War priorities ($6,996 million); realign DOE, including terminating the Clean Coal Technology Program; privatizing the naval petroleum reserves in Elk Hills, CA; selling uranium no longer needed for national defense purposes; reducing costs in DOE's applied research programs; improving program effectiveness and efficiencies in environmental management of nuclear waste cleanups; and strategically aligning headquarters and field operations ($10,649 million); strengthen and restructure NASA management, both overall management and management of the space station program ($1,982 million); and reinvent NASA, including eliminating duplication and overlap between NASA centers, transferring functions to universities or the private sector, reducing civil service involvement with and expecting more accountability from NASA contractors, emphasizing objective contracting, using private sector capabilities, changing NASA regulations, and returning NASA to its status as a research and development center ($8,519 million). Since these recommendations are not representative of all NPR recommendations, our findings cannot be generalized to apply to other savings claimed by NPR. As agreed with your office, we did not independently estimate the actual amount of savings achieved from these six recommendations. We interviewed NPR and OMB officials about how they estimated and claimed savings and also requested relevant documentation. We also examined a database OMB maintained showing the amount of savings achieved from the recommendations. The NPR I data covered fiscal years 1994 through 1999, and the NPR II data covered fiscal years 1996 through 2000. Both sets of data were most recently updated in the summer of 1997. We reviewed NPR data, including a description of the status of the recommendations and reports containing background information, on the three agencies and the relevant recommendations where available. We also interviewed officials from these agencies about the savings OMB estimated for the recommendations we reviewed. We conducted our review in Washington, D.C., from April 1998 through February 1999 in accordance with generally accepted government auditing standards. We requested comments on a draft of this report from OMB, the Departments of Agriculture and Energy, and NASA. These comments are discussed at the end of this letter. OMB generally did not distinguish between NPR's and other contributions for the agency-specific recommendations we reviewed. NPR attempted to build on prior management reforms and operated in an atmosphere where other factors, such as agencies' ongoing reforms as well as the political environment, also influenced actions taken to address NPR's recommendations. The relationship between the recommendations we reviewed and the savings claimed was not clear because OMB attributed a broad range of changes to NPR. Savings estimated from the recommendation to reinvent NASA illustrate how OMB attributed a broad range of changes to NPR and did not distinguish NPR's contribution from other factors. To estimate savings for that recommendation, OMB consolidated seven somewhat related recommendations into one savings estimate of $8.519 billion. OMB estimated savings by totaling expected reductions to NASA's entire budget for fiscal years 1996 through 2000. According to a NASA official, NASA's funding during this period was limited as the result of several initiatives, including direction from the NASA administrator that began before NPR was initiated and congressionally imposed spending caps. Nevertheless, OMB attributed all of the $8.519 billion in savings from estimated reductions in the entire NASA budget to NPR. OMB followed similar procedures in estimating savings from the other NPR recommendation concerning NASA that we reviewed--the recommendation to strengthen and restructure NASA management. The examiner estimated savings of $1.982 billion on the basis of expected reductions in funding levels for one of NASA's three budget accounts for fiscal years 1994 through 1999. The estimated savings were based on expectations for lower levels of budget authority due to the combined effects of several factors, such as budgetary spending caps and ongoing NASA management reform efforts. In the case of the NPR recommendation for DOE to shift its laboratory facilities' priorities in response to conditions that accompanied the end of the Cold War, NPR recognized that changes were already under way. For example, as part of this recommendation, NPR called for DOE to "continue" the reduction of funding for nuclear weapons production, research, testing programs, and infrastructure. Considering the comprehensive nuclear test ban treaty agreements and other factors, it was apparent that the DOE laboratories' priorities would have changed regardless of whether NPR had made the recommendation. However, as figure 1 shows, when OMB estimated savings from this recommendation, it credited all savings from estimated reductions in the weapons activity budget account ($6.996 billion) to NPR. Similarly, efforts related to NPR's recommendation to reorganize USDA were under way prior to or simultaneously with the NPR recommendation. These efforts included USDA reorganization plans and the introduction of legislation to streamline USDA. For example, the Federal Crop Insurance Reform and Department of Agriculture Reorganization Act of 1994 (P.L. 103-354, Oct. 13, 1994), required USDA to reduce the number of federal staff years by at least 7,500 by the end of fiscal year 1999. Therefore, USDA's reorganization could be viewed as part of a continuous management improvement effort. OMB attributed the entire $770 million in estimated savings it reported from USDA's staffing reductions to NPR. In contrast, the relationship between the recommended action and the estimated savings was relatively straightforward for the NPR recommendation to end USDA's wool and mohair subsidy program. In that case, program costs, primarily subsidy amounts that were reduced by phasing out the program and subsequently eliminated by ending the program, were counted as savings. According to OMB, the procedures and techniques it used to estimate NPR savings were those that it commonly follows in developing the President's budget. Therefore the NPR savings estimates were to provide a "snapshot" showing the amount of savings OMB expected would result from the recommendations. For example, in 1993, OMB projected savings from the NPR recommendation to strengthen and restructure NASA management covering fiscal years 1994 through 1999. OMB characterized these estimated savings as achieved in 1996, and NPR has continued to report these estimated savings (based on the 1993 estimate) as achieved. More generally, OMB's savings estimates for agency-specific recommendations included about $34.3 billion in savings that were not expected to be realized until fiscal years 1999 and 2000. OMB last updated its estimates in 1997, so any changes that have occurred since then are not reflected in NPR's claimed savings. OMB's budget estimating procedures and techniques use policies and economic forecasts in effect at a given time. The estimates OMB prepared for NPR initiatives involved projecting changes from a given baseline and identifying the difference as savings. OMB said that it generally used a fiscal year 1994 current services baseline for the NPR I agency-specific recommendations and a fiscal year 1996 Omnibus Budget Reconciliation Act baseline for the NPR II recommendations. OMB said, however, that in both cases, program examiners could use other savings baselines where the examiners believed it made better sense for a particular program or NPR recommendation. The OMB examiners also had latitude in determining the most appropriate analytical approach to use, based on their knowledge of the agency and the specific characteristics of the individual NPR recommendation. Our prior reviews of budget estimates have shown that it is difficult to reconstruct the specific assumptions used or to track savings for estimates produced several years ago. As we reported in 1996, once an estimate is prepared and time passes, it becomes difficult to retrace the original steps and reconstruct events in order to replicate the original estimate.Moreover, it is often difficult to isolate the impacts of particular proposals on actual savings achieved due to the multiple factors involved. In our 1994 report on issues concerning the 1990 Reconciliation Act, we found that it is generally not possible to identify or track precise savings by isolating the budgetary effects of individual provisions from the effects of other factors such as intervening actions or subsequent legislation. In two instances, OMB counted some of the estimated savings NPR claimed twice. In the first instance, OMB counted the same estimated savings on two different NPR I initiatives--once for agency-specific changes (from reorganizing USDA) and again as part of a NPR governmentwide initiative to reduce the bureaucracy. In the second instance, OMB appears to have counted the same savings twice when separately estimating savings from the two NASA recommendations we reviewed. Therefore, the total estimated savings NPR claimed in both of these instances were overstated. OMB estimated that $770 million in cost savings resulted from NPR's recommendation to reorganize USDA on the basis of workforce reductions. OMB also counted these workforce reductions when estimating the total of $54.8 billion in savings NPR claimed from its governmentwide initiative to reduce the size of the bureaucracy. While acknowledging that this occurred, OMB officials stated that the level of double counting appeared to be quite small in relation to total NPR savings--less than 1 percent of the total savings claimed from NPR recommendations. They said that the double counting was small because the recommendation to reorganize USDA was the only agency-specific recommendation with a significant staffing effect. However, OMB officials told us that they had not established a mechanism to prevent double counting from savings claimed for the agency-specific recommendations and from the governmentwide initiative. Officials from the other two agencies we reviewed--DOE and NASA--said that their staff also had been reduced and counted as part of the savings claimed for the agency-specific recommendations to streamline DOE and strengthen NASA management. Therefore, in the absence of OMB processes to guard against including savings from personnel reductions in both agency- specific and governmentwide savings claims, additional double counting of workforce reductions could have occurred. In the second instance, a portion of the estimated savings appears to have been counted twice for two NASA recommendations we reviewed, one from NPR I (to strengthen and restructure NASA management) and the other from NPR II (to reinvent NASA). Some of the actions NPR recommended, such as restructuring NASA centers, were components of both the NPR I and NPR II recommendations. The OMB examiner acknowledged that some of the savings could have been counted twice and that there was no mechanism to distinguish the sweeping changes that were occurring at NASA. She said that the NPR II recommendation built on the NPR I recommendation. NASA officials also said that they were not able to assign savings precisely to one recommendation or the other because the recommendations were similar and there was no clear demarcation where one ended and the other began. OMB estimated savings from the NPR I recommendation for fiscal years 1994 through 1999 and from the NPR II recommendation for fiscal years 1996 through 2000. Estimated savings from both recommendations were included when OMB aggregated total NPR-estimated savings. As figure 2 shows, a portion of the savings claimed from these two recommendations overlapped during fiscal years 1996 through 1999. For those years, claimed savings totaled about $7 billion (about $1.6 billion from the NPR I recommendation and about $5.4 billion from the NPR II recommendation). OMB appears to have counted some portion of that amount twice-- potentially up to $1.4 billion. The NPR savings claims in these two instances were overstated. OMB and CBO both estimated savings for the recommendation to streamline USDA, and these estimates differed. While OMB estimated the savings to be $770 million, CBO's estimate was $446 million--a difference of $324 million. We did not evaluate the differences between these estimates. However, according to a November 15, 1993, letter from the CBO director to the then House Minority Leader, CBO's estimate differed from OMB's ". . . with respect to the costs associated with severance benefits and relocation. While the administration assumes that agency baseline budgets are large enough to absorb these costs, CBO assumes that the costs would reduce the potential savings. The administration also estimates larger savings in employee overhead costs." According to CBO, due to the differences in the consideration of offsetting costs, OMB's estimate for the 5-year budget period (fiscal years 1994 through 1998) exceeded CBO's estimate by $324 million. OMB provided documentation showing that, in fiscal year 1996 and again in fiscal year 1997, OMB factored "up-front" costs of $40 million into the estimates it reported. The responsible OMB branch chief stated that although he did not recall what the up-front costs for this recommendation specifically encompassed, these costs typically consist of buyouts (i.e., financial incentives of up to $25,000 for employees who voluntarily leave the federal government), lease breakage costs, and moving expenses. According to OMB, consistent with its normal budget practices, OMB examiners generally did not retain documentation for NPR savings estimates. The budget examiners were unable to document estimates for four of the six recommendations we reviewed, constituting $21.8 billion in savings claims. Instead, the OMB examiners attempted to reconstruct how they thought the savings had been estimated through approximating rather than replicating savings estimates. OMB did, however, provide documentation on the estimated savings for two of the six recommendations we reviewed. These recommendations were to reorganize USDA (with estimated savings of $770 million) and to redirect the DOE laboratories' priorities (with estimated savings of $6.996 billion). Even when documentation for the NPR savings estimates was available, OMB could not always provide complete information about how the estimates were calculated. For example, the responsible OMB branch chief could not specifically remember what comprised the up-front costs shown on documentation for the recommendation to reorganize USDA. The NPR savings claims for both cases where OMB provided documentation were reported incorrectly. These errors led NPR to understate the estimated savings from those recommendations. One of the errors involved a math mistake that affected the amount of savings claimed. When updating the estimate, a subtraction error led to $10 million in estimated savings being omitted from the total claimed for the recommendation to redirect the DOE laboratories' priorities. The other error occurred because savings of $1.859 billion that the examiner estimated would occur from the recommendation to reorganize USDA for fiscal years 1997 through 1999 were not reported. NPR claimed savings from agency-specific recommendations that could not be fully attributed to its efforts. In general, the savings estimates we reviewed could not be replicated, and there was no way to substantiate the savings claimed. We also found that some savings were overstated because OMB counted savings twice, and two of the estimates were reported incorrectly, resulting in claims that were understated. We requested comments on a draft of this report from the Director of OMB, the Secretaries of Agriculture and Energy, and the NASA Administrator, or their designees. On June 14, 1999, we met with OMB staff who provided clarifying and technical comments on the draft report. We incorporated their suggestions in this report where appropriate. We obtained written comments on the draft report from the Director of USDA's Office of Budget and Program Analysis. He said that a loan program for mohair producers established in fiscal year 1999 provides substantially different incentives than the original wool and mohair program. His letter stated that the costs associated with the 1999 program did not negate the savings derived from eliminating the earlier program. As a result, we eliminated our discussion concerning this loan program from the report. We also obtained written comments on the draft report from DOE's Controller. She said that OMB's use of the weapons activity budget account to estimate savings from the recommendation to redirect the energy laboratories to post-Cold War priorities is more reasonable than is implied by the report. She explained that while the title of the NPR recommendation suggests that only laboratories would be affected by the recommendation, related NPR information indicates that the recommendation affected facilities beyond just the laboratories. We added language to the report recognizing that the recommendation, although focused on the laboratories, did include actions to reduce the production and testing of nuclear weapons. Secondly, she said that DOE had progressed beyond the status NPR reported for the initiatives included in the recommendation to realign DOE, and we included the updated information in appendix IV. On June 2, 1999, a NASA official reported that NASA had no comments on our draft report. As agreed, unless you announce the contents of this report earlier, we plan no further distribution until 30 days from the date of this letter. At that time, we will send copies of this report to Representative Henry A. Waxman, Ranking Minority Member of the House Government Reform Committee and to Senator Fred Thompson, Chairman, and Senator Joseph I. Lieberman, Ranking Minority Member, of the Senate Governmental Affairs Committee. We will also send copies to the Honorable Jacob J. Lew, Director of OMB; Mr. Morley Winograd, Director of NPR; the Honorable Daniel R. Glickman, Secretary of Agriculture; the Honorable Bill Richardson, Secretary of Energy; and the Honorable Daniel S. Goldin, Administrator of NASA. We will also make copies available to others on request. Major contributors to this report appear in appendix VII. Please contact me or Susan Ragland, Assistant Director, on (202) 512-8676 if you have questions about this report. In September 1993, NPR recommended that USDA be reorganized to better accomplish its mission, streamline its field structure, and improve service to its customers. NPR had recommended that USDA reorganize its structure, submit legislation to enact the reorganization, and review its field office structure to eliminate and restructure those elements no longer appropriate. NPR reported that USDA has made progress towards reorganizing at its headquarters and field office structure. USDA submitted reorganization legislation, and Congress enacted the Federal Crop Insurance Reform and Department of Agriculture Reorganization Act of 1994 (P.L. 103-354) on October 13, 1994. The reorganization at the headquarters level has reduced the number of agencies from 43 to 29 and has established 7 "mission areas" to carry out program responsibilities. USDA also implemented a field office streamlining plan that consolidates the county-based agencies to provide services to customers from all agencies at one location. This effort is to result in streamlining the number of field office locations from over 3,700 to 2,550. As of May 1998, the total number of field office locations had been reduced to about 2,700. OMB officials stated that savings for this recommendation were derived solely from the number of full-time equivalent (FTE) reductions USDA made. OMB took the difference between the fiscal year 1994 current services baseline and actual and updated reductions and then multiplied that amount by an average salary that was comprised of both headquarters and field office salary data. From that amount, OMB subtracted offsetting costs. OMB officials provided documentation on how these savings were estimated. In September 1993, NPR recommended that USDA end this subsidy program, which was implemented in 1954 to increase domestic production of wool by providing direct payments to farmers. At that time, Congress declared wool a strategic commodity to reduce dependence on foreign fibers, which was caused by imports needed during World War II and the Korean conflict. NPR said that this subsidy was outdated, since wool was no longer a strategic commodity. NPR reported that this subsidy had been eliminated as a result of legislation amending the National Wool Act of 1954 (P.L. 103-130, November 1, 1993). The act mandated the reduction of subsidies during fiscal years 1994 and 1995 and the elimination of subsidies for fiscal year 1996. Payments were reduced by 25 percent in fiscal year 1994, 50 percent in fiscal year 1995, and eliminated entirely beginning in fiscal year 1996. In response to our questions, although they were unable to provide documentation on how savings were estimated, OMB generally could reconstruct how savings would have been estimated. This involved subtracting the payments that farmers were receiving as a result of the subsidy reductions mandated in P.L.103-130 from the amount of subsidies that were projected to have been paid, had the legislation not been enacted, for fiscal years 1994 through 1999. OMB said that the source of the projected subsidy information was 1993 data from the Commodity Credit Corporation, which analyzes budget projections and assumptions. In 1993, NPR recommended that DOE shift laboratory facilities' priorities to accommodate conditions that accompanied the end of the Cold War-- such as the dramatic decrease in the arms race and cutbacks in defense- related energy and nuclear research funding. NPR recommended, among other things, that DOE continue to reduce funding for nuclear weapons production, research, testing programs, and infrastructure that are needed to meet current defense requirements; develop a vision for the DOE laboratory complex; and encourage laboratory managers to work with the private sector on high-priority research and development (R&D) needs. NPR reported that DOE is restructuring and refocusing its laboratories by developing new strategic plans and implementing a science-based stockpile stewardship program. The stockpile stewardship program is designed to support the testing of nuclear weapons in a safe manner as directed by the comprehensive nuclear test ban treaty, which banned the production of nuclear weapons after the Cold War. DOE has also established the Laboratory Operations Board and the R&D Council. These organizations study the use of government/private partnerships to increase productivity of DOE R&D programs. OMB calculated savings for redirecting energy laboratories to post-Cold War priorities by taking the difference in the weapons activities budget account between the fiscal year 1994 current services baseline and the actual appropriations for that fiscal year and counting the savings through fiscal year 1999. The DOE laboratories' budget is subsumed within the weapons activities account of the President's budget. This account includes R&D to support the safety and reliability of the nuclear weapons stockpile as well as personnel and contractual services for certain defense programs' missions. OMB considered DOE laboratories as well as the entire weapons complex, of which the laboratories are a component, when estimating savings for this recommendation. OMB officials provided documentation on how these savings were estimated. In 1995, NPR had six recommendations concerning realignment of DOE. NPR consolidated reporting on these recommendations for purposes of developing savings estimates. These recommendations were to (1) terminate the Clean Coal Technology Program; (2) privatize the naval petroleum reserves in Elk Hills, CA; (3) sell uranium no longer needed for national defense purposes; (4) reduce costs in DOE's applied research programs; (5) improve program effectiveness and efficiencies in environmental management of nuclear waste cleanups; and (6) strategically align headquarters and field operations. NPR reported that DOE has implemented actions consistent with these recommendations. For instance, NPR reported that DOE is planning to terminate the Clean Coal Technology Program by September 2000. DOE has reorganized the department by implementing the Strategic Alignment Initiative, which is intended to reduce staffing, support service contracting, and travel costs; streamline the National Environmental Policy Act; increase asset sales; and improve information resources management. DOE has also established performance measures to improve effectiveness of nuclear waste cleanups, developed a plan for selling uranium reserves, and is developing ways to reduce administrative costs in DOE's research programs. More recently, DOE noted that the Elk Hills Naval Petroleum Reserves were sold in February 1998 for $3.1 billion. Similarly, in fiscal year 1998, $0.4 billion was realized due to DOE's uranium being a part of the sale of the United States Enrichment Corporation. OMB could not reconstruct calculations for the savings estimated for this recommendation. In September 1993, NPR recommended that NASA take a number of restructuring steps, both in overall management and in the management of the space station program. It recommended that NASA, among other things, aggressively complete its overhaul of space station program management, implement the management principles developed for the redesigned space station program, and formally institute its Program Management Council (PMC), an organization charged with improving NASA's internal management processes. NPR reported that NASA has taken and is continuing to take steps to improve the management of the agency and the space station. According to NPR, NASA's overhaul of space station program management was accomplished through enactment of the fiscal year 1995 Appropriations Act (P.L. 103-327, September 28, 1994). Also, the PMC was established in June 1993 and is fully operational. In response to our questions, OMB attempted to reconstruct how savings were estimated, but could not provide documentation to support its calculation. OMB officials said the methodology they would have used to estimate savings for this recommendation was to take the difference between the fiscal year 1994 current services baseline and the actual appropriations for that fiscal year and count the savings through fiscal year 1999. In 1995, NPR recommended that NASA be reinvented. This recommendation built on the earlier NPR recommendation to strengthen and restructure NASA management. OMB consolidated seven recommendations that related to reinventing NASA for developing savings estimates. These recommendations included (1) eliminating duplication and overlap between NASA centers; (2) transferring functions to universities or the private sector; (3) reducing civil service involvement with and expecting more accountability from NASA contractors; (4) emphasizing objective contracting; (5) using private sector capabilities; (6) changing NASA regulations; and (7) returning NASA to its status as a research and development agency. NPR reported that NASA has completed actions consistent with this consolidated recommendation. For instance, NPR reported that NASA has restructured its centers to eliminate overlap and duplication of functions and has implemented techniques, such as forming partnerships and outsourcing functions. NPR also reported that NASA was creating alliances with academic and industrial centers and consolidating all space shuttle operations management under a single, private sector prime contractor. In addition, NPR reported that NASA has implemented a performance-based contracting initiative. In response to our questions, OMB attempted to reconstruct how savings were estimated, but could not provide documentation to support its calculation. An OMB official said she took the difference between the fiscal year 1996 current services baseline and the actual appropriations for that fiscal year and counted savings through fiscal year 2000. In addition to those named above, Carole Buncher, Lauren Alpert, and Jenny Kao made key contributions to this report. 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. 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Pursuant to a congressional request, GAO reviewed the savings claims from the National Performance Review (NPR), which has been renamed the National Partnership for Reinventing Government, focusing on how the Office of Management and Budget (OMB) estimated savings from selected NPR recommendations targeted toward individual agencies. GAO noted that: (1) NPR claimed savings from agency-specific recommendations that could not be fully attributed to its efforts; (2) OMB generally did not distinguish NPR's contributions from other initiatives or factors that influenced budget reductions at the agencies GAO reviewed; (3) therefore, the relationship between the recommended action and the savings claimed from the recommendations GAO reviewed was not clear; (4) to estimate the savings from the agency-specific recommendations, OMB said it used the same types of procedures and analytic techniques that have long been used in developing the President's budget; (5) as GAO's previous reviews of budget estimates have shown, it is difficult to reconstruct the specific assumptions used and track savings for estimates produced several years ago; (6) moreover, GAO has reported that it is often impossible to isolate the impacts of particular proposals or recommendations on actual savings achieved due to the multiple factors involved; (7) OMB relied on these point-in-time estimates rather than attempting to measure actual savings; (8) OMB last updated its estimates in 1997, so any changes that have occurred since then are not reflected in NPR's claimed savings; (9) GAO identified two instances where OMB counted at least part of the estimated savings twice; (10) therefore, the total estimated savings from the Department of Agriculture (USDA) and National Aeronautics and Space Administration recommendations were overstated; (11) for one recommendation where OMB and the Congressional Budget Office (CBO) both estimated savings, GAO found that offsetting program costs may not have been fully included in OMB's estimates; (12) in estimating savings that resulted from personnel reductions at USDA, OMB and CBO considered different offsetting costs and arrived at different estimates, with CBO's estimate being $324 million less than OMB's $770 million estimate; (13) according to CBO, it assumed that severance benefits and relocation costs would reduce the potential savings, while OMB assumed that the agency could absorb those costs; (14) consistent with OMB's normal budget practices, OMB examiners generally did not retain documentation when estimating NPR savings; (15) instead, the OMB examiners attempted to reconstruct how they thought the savings had been estimated through approximating rather than replicating savings estimates; (16) OMB had documentation for two of the recommendations GAO reviewed; and (17) however, GAO found that the savings were reported incorrectly.

Radiation detection equipment can detect radioactive materials used in medicine and industry; in commodities that are sources of naturally occurring radiation, such as kitty litter; and in nuclear materials that could be used in a nuclear weapon. The capability of the equipment to detect nuclear material depends on many factors, including the amount of material, the size and capacity of the detection device, the distance from the detection device to the nuclear material, and whether the material is shielded from detection. Detecting actual cases of illicit trafficking in weapons-usable nuclear material is complicated because one of the materials that is of greatest concern--highly enriched uranium--is among the most difficult materials to detect because of its relatively low level of radioactivity. In contrast, medical and industrial radioactive sources, which could be used in a radiological dispersion device (or "dirty bomb"), are highly radioactive and easier to detect. Because of the complexities of detecting and identifying nuclear material, customs officers and border guards who are responsible for operating detection equipment must also be trained in using handheld radiation detectors to pinpoint the source of an alarm, identify false alarms, and respond to cases of nuclear smuggling. Four U.S. agencies have implemented programs to combat nuclear smuggling both domestically and in other countries by providing radiation detection equipment and training to border security personnel. From fiscal year 1994 through fiscal year 2005, the Congress has appropriated about $800 million for these efforts, including about $500 million to DOE, DOD, and State for international efforts and about $300 million to DHS for installing radiation detection equipment at U.S. points of entry. Initial concerns about the threat posed by nuclear smuggling were focused on nuclear materials originating in the former Soviet Union. As a result, the first major initiatives to combat nuclear smuggling during the late 1990s concentrated on deploying radiation detection equipment at borders in countries of the former Soviet Union and in Central and Eastern Europe. Assistance included providing these countries with commercially available radiation detection equipment such as portal monitors (stationary equipment designed to detect radioactive materials carried by pedestrians or vehicles) and smaller, portable radiation detectors. In addition, U.S. agencies provided technical support to promote the development and enforcement of laws and regulations governing the export of nuclear related technology and other equipment and training to generally improve these countries' ability to interdict nuclear smuggling. One of the main U.S. efforts providing radiation detection equipment to foreign governments is DOE's Second Line of Defense program, which began installing equipment at key border crossing sites in Russia in 1998. According to DOE, through the end of fiscal year 2004, the Second Line of Defense program had completed installations at 66 sites, mostly in Russia. Additionally, in 2003, DOE began its Megaports Initiative, which seeks to install radiation detection equipment at major foreign seaports to enable foreign government personnel to screen shipping containers entering and leaving these ports for nuclear and other radioactive material. In March 2005, we reported that the Megaports Initiative had completed installations at two foreign ports and is currently working to equip five others with radiation detection equipment. Other U.S. agencies also have programs to provide radiation detection equipment and training to foreign governments, including two programs at the Department of State--the Nonproliferation and Disarmament Fund and Export Control and Related Border Security program--and two programs at DOD--the International Counterproliferation Program and the Weapons of Mass Destruction Proliferation Prevention Initiative. In addition to these efforts at foreign borders, the U.S. Customs Service began providing its inspectors at U.S. borders and points of entry with small handheld radiation detection devices, known as radiation pagers, in fiscal year 1998. After September 11, 2001, this effort was expanded by DHS's Bureau of Customs and Border Patrol. In the spring of 2002, DHS conducted a pilot project to test the use of radiation portal monitors larger-scale radiation detection equipment that can be used to screen vehicles and cargo. In October 2002, DHS began its deployment of portal monitors at U.S. points of entry. In May 2005, DHS reported that it has installed more than 470 radiation portal monitors nationwide at sites including international mail and package handling facilities, land border crossings, and seaports. A common problem faced by U.S. programs to combat nuclear smuggling both domestically and in other countries is the lack of effective planning and coordination among the agencies responsible for implementing these programs. Regarding assistance to foreign countries, we reported in 2002 that there was no overall governmentwide plan to guide U.S. efforts, some programs were duplicative, and coordination among the U.S. agencies was not effective. We found that the most troubling consequence of this lack of effective planning and coordination was that DOE, State, and DOD were pursuing separate approaches to enhancing other countries' border crossings. Specifically, radiation portal monitors installed in more than 20 countries by State are less sophisticated than those installed by DOE and DOD. As a result, some border crossings where U.S. agencies have installed radiation detection equipment are more vulnerable to nuclear smuggling than others. We found that there were two offices within DOE that were providing radiation detection equipment and two offices within State that have funded similar types of equipment for various countries. We made several recommendations to correct these problems and, since the issuance of our report, a governmentwide plan encompassing U.S. efforts to combat nuclear smuggling in other countries has been developed; some duplicative programs have been consolidated; and coordination among the agencies, although still a concern, has improved. Regarding efforts to deploy radiation detection equipment at U.S. points of entry, we reported that DHS had not coordinated with other federal agencies and DOE national laboratories on longer-term objectives such as attempting to improve the radiation detection technology used in portal monitors. We also noted that DHS was not sharing data generated by portal monitors installed at U.S. points of entry with DOE national laboratories other than Pacific Northwest National Laboratory, which is DHS's primary contractor for deploying radiation detection equipment at U.S. points of entry. Experts from DOE's national laboratories told us that achieving improvements to existing radiation detection technologies largely depends on analyzing data on the types of radioactive cargo passing through deployed portal monitors. We found that a number of factors hindered coordination, including competition between the DOE national laboratories and the emerging missions of various federal agencies with regard to radiation detection. DHS agreed with our assessment and told us that it would be taking corrective actions. Additionally, other DOE national laboratories and federal agencies are independently testing numerous different radiation portal monitors using a variety of nuclear and radiological materials and simulating possible smuggling scenarios. However, they are not sharing lessons learned or the results of these tests with other federal agencies. For example, DOD's Defense Threat Reduction Agency has a large testing facility near Sandia National Laboratories in New Mexico and has pilot tested radiation detection equipment at entrances to certain military bases. However, it is unclear how and with whom the results of such testing are shared to facilitate the development of improved radiation detection technologies. In April 2005, DHS announced its intent to create the Domestic Nuclear Detection Office (DNDO) to coordinate U.S. efforts to develop improved radiation detection technologies. DHS has requested over $227 million in fiscal year 2006 to initiate this effort. Through DNDO, DHS plans to lead the development of a national test bed for radiation detection technologies at the Nevada Test Site. Recently, concerns have been raised about the ability of radiation detection equipment to detect illicitly trafficked nuclear material. As we have reported in the past, certain factors can affect the general capability of radiation detection equipment. In particular, nuclear materials are more difficult to detect if lead or other metal is used to shield them. For example, we reported in March 2005 that a cargo container containing a radioactive source passed through radiation detection equipment that DOE had installed at a foreign seaport without being detected because of the presence of large amounts of scrap metal in the container. Additionally, detecting actual cases of illicit trafficking in weapons-usable nuclear material is complicated because one of the materials of greatest concern in terms of proliferation--highly enriched uranium--is among the most difficult materials to detect due to its relatively low level of radioactivity. The manner in which radiation detection equipment is deployed, operated, and maintained can also limit its effectiveness. Given the inherent limitations of currently deployed radiation detection equipment and difficulties in detecting certain nuclear materials, it is important that it be installed, operated, and maintained in a way that optimizes authorities' ability to interdict illicit nuclear materials. In our past reports, we have noted many problems with the radiation detection equipment currently deployed at U.S. and foreign borders. Specifically, in October 2002, we testified that radiation detection pagers have severe limitations and are inappropriate for some tasks. DOE officials told us that the pagers have a limited range and are not designed to detect weapons-usable nuclear material. According to U.S. radiation detection vendors and DOE national laboratory specialists, pagers are more effectively used in conjunction with other radiation detection equipment, such as portal monitors. In addition, the manner in which DHS had deployed radiation detection equipment at some U.S. points of entry reduced its effectiveness. Specifically, we identified a wide range of problems, such as (1) allowing trucks to pass through portal monitors at speeds higher than what experts consider optimal for detecting nuclear material, (2) reducing the sensitivity of the portal monitors in an attempt to limit the number of nuisance alarms from naturally occurring radioactive materials, such as kitty litter and ceramics, and (3) not deploying enough handheld radiation detection equipment to certain border sites, which limited the ability of inspectors to perform secondary inspections on suspicious cargo or vehicles. Regarding problems with the U.S. programs to deploy radiation detection equipment in other countries, we reported that: About half of the portal monitors provided to one country in the former Soviet Union were never installed or were not operational. Officials from this country told us that they were given more equipment than they could use. A radiation portal monitor provided to Bulgaria by the Department of State was installed on an unused road that was not expected to be completed for 1-1/2 years. Mobile vans equipped with radiation detection equipment furnished by the Department of State have limited utility because they cannot operate effectively in cold climates or are otherwise not suitable for conditions in some countries. DOE has found that environmental conditions at many seaports, such as the existence of high winds and sea spray, can affect radiation detection equipment's performance and sustainability. Environmental conditions are not the only challenge facing DOE and DHS in installing radiation detection equipment at seaports in the United States and other countries. One of the biggest challenges at seaports is adapting the equipment to the port environment while minimizing the impact on the flow of commerce and people. DOE's Megaports Initiative had made limited progress in installing radiation detection equipment at foreign seaports it had identified as highest priority largely due to concerns of some countries about the impact of radiation detection equipment on the flow of commerce through their ports. DHS has faced similar concerns from port operators in the United States. It is important to note that radiation detection equipment is only one of the tools in the toolbox that customs inspectors and border guards must use to combat nuclear smuggling. Combating nuclear smuggling requires an integrated approach that includes equipment, proper training, and intelligence gathering on smuggling operations. In the past, most known interdictions of weapons-usable nuclear materials have resulted from police investigations rather than from detection by radiation detection equipment installed at border crossings. However, there have been recent reports of incidents where radioactive materials were discovered and seized as a result of alarms raised by radiation detection equipment. Because of the complexity of detecting nuclear material, the customs officers or border guards who are responsible for operating radiation detection equipment must also be well-trained in using handheld radiation detectors to pinpoint the source of an alarm, identifying false alarms, and responding to cases of nuclear smuggling. Without a clear understanding of how radiation detection equipment works and its limitations, inspectors may not be using the equipment as effectively as possible. Although efforts to combat nuclear smuggling through the installation of radiation detection equipment are important, the United States should not and does not rely upon radiation detection equipment at foreign or U.S. borders as its sole means for preventing nuclear materials or a nuclear warhead from reaching the United States. Recognizing the need for a broad approach to the problem, the U.S. government has multiple initiatives that are designed to complement each other. For example, DOE is securing nuclear material at its source through the Material Protection, Control, and Accounting program, which seeks to improve the physical security of nuclear facilities in the former Soviet Union. In addition, DHS has other initiatives to identify containers at foreign seaports that are considered high risk for containing smuggled goods, such as nuclear material and other dangerous materials. Supporting all of these programs is intelligence information that can give us advanced notice of nuclear material smuggling and is a critical component to prevent dangerous materials from entering the United States. This concludes my prepared statement. I would be happy to respond to any questions that you or other Members of the Subcommittees may have. For further information about this testimony, please contact me at (202) 512-3841 or at [email protected]. R. Stockton Butler, Julie Chamberlain, Nancy Crothers, Christopher Ferencik, Emily Gupta, Jennifer Harman, Winston Le, Glen Levis, F. James Shafer, Jr., and Gene Wisnoski made key contributions to this statement. Preventing Nuclear Smuggling: DOE Has Made Limited Progress in Installing Radiation Detection Equipment at Highest Priority Foreign Seaports. GAO-05-375. Washington, D.C.: March 31, 2005. Weapons of Mass Destruction: Nonproliferation Programs Need Better Integration. GAO-05-157. Washington, D.C.: January 28, 2005. Customs Service: Acquisition and Deployment of Radiation Detection Equipment. GAO-03-235T. Washington, D.C.: October 17, 2002. Container Security: Current Efforts to Detect Nuclear Materials, New Initiatives, and Challenges. GAO-03-297T. Washington, D.C.: November 18, 2002. Nuclear Nonproliferation: U.S. Efforts to Combat Nuclear Smuggling. GAO-02-989T. Washington, D.C.: July 30, 2002. Nuclear Nonproliferation: U.S. Efforts to Help Other Countries Combat Nuclear Smuggling Need Strengthened Coordination and Planning. GAO-02-426. Washington, D.C.: May 16, 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.

According to the International Atomic Energy Agency, between 1993 and 2004, there were 650 confirmed cases of illicit trafficking in nuclear and radiological materials worldwide. A significant number of the cases involved material that could be used to produce either a nuclear weapon or a device that uses conventional explosives with radioactive material (known as a "dirty bomb"). Over the past decade, the United States has become increasingly concerned about the danger that unsecured weapons-usable nuclear material could fall into the hands of terrorists or countries of concern. In the aftermath of September 11, 2001, there is heightened concern that terrorists may try to smuggle nuclear materials or a nuclear weapon into the United States. This testimony summarizes the results of our previous reports on various U.S. efforts to combat nuclear smuggling both in the United States and abroad. Specifically, this testimony discusses (1) the different U.S. federal agencies tasked with installing radiation detection equipment both domestically and in other countries, (2) problems with coordination among these agencies and programs, and (3) the effectiveness of radiation detection equipment deployed in the United States and other countries. Four U.S. agencies, the Departments of Energy (DOE), Defense (DOD), State, and Homeland Security (DHS), are implementing programs to combat nuclear smuggling by providing radiation detection equipment and training to border security personnel. From fiscal year 1994 through fiscal year 2005, the Congress has appropriated about $800 million for these efforts, including about $500 million to DOE, DOD, and State for international efforts and about $300 million to DHS for installing radiation detection equipment at U.S. points of entry. The first major initiatives to combat nuclear smuggling concentrated on deploying radiation detection equipment at borders in countries of the former Soviet Union. In particular, in 1998, DOE established the Second Line of Defense program, which has installed equipment at 66 sites mostly in Russia through the end of fiscal year 2004. In 2003, DOE began its Megaports Initiative to focus on the threat posed by nuclear smuggling at major foreign seaports and to date has completed installations at two ports. Regarding efforts at U.S. points of entry, the U.S. Customs Service began providing its inspectors with portable radiation detection devices in 1998 and expanded its efforts to include larger-scale radiation detection equipment after September 11, 2001. This program is continuing under DHS, which reported in May 2005 that it has installed more than 470 radiation portal monitors nationwide at mail facilities, land border crossings, and seaports. A common problem faced by U.S. programs to combat nuclear smuggling is the lack of effective planning and coordination among the responsible agencies. For example, we reported in 2002 that there was no overall governmentwide plan to guide U.S. efforts, some programs were duplicative, and coordination among U.S. agencies was not effective. We found that the most troubling consequence of this lack of effective planning and coordination was that the Department of State had installed less sophisticated equipment in some countries leaving those countries' borders more vulnerable to nuclear smuggling than countries where DOE and DOD had deployed equipment. Since the issuance of our report, the agencies involved have made some progress in addressing these issues. Regarding the deployment of equipment in the United States, we reported that DHS had not effectively coordinated with other federal agencies and DOE national laboratories on longer-term objectives, such as attempting to improve the radiation detection technology. We found that a number of factors hindered coordination, including competition between DOE national laboratories and the emerging missions of various federal agencies with regard to radiation detection. The effectiveness of the current generation of radiation detection equipment is limited in its ability to detect illicitly trafficked nuclear material, especially if it is shielded by lead or other metal. Given the inherent limitations of radiation detection equipment and difficulties in detecting certain materials, it is important that the equipment be installed, operated, and maintained in a way that optimizes its usefulness. It is also important to note that the deployment of radiation detection equipment--regardless of how well such equipment works--is not a panacea for the problem of nuclear smuggling. Rather, combating nuclear smuggling requires an integrated approach that includes equipment, proper training of border security personnel in the use of radiation detection equipment, and intelligence gathering on potential nuclear smuggling operations.

Medicare consists of four parts--A, B, C, and D. Medicare Part A provides payment for inpatient hospital, skilled nursing facility, some home health, and hospice services, while Part B pays for hospital outpatient, physician, some home health, durable medical equipment, and preventive services. In addition, Medicare beneficiaries have an option to participate in Medicare Advantage, also known as Part C, which pays private health plans to provide the services covered by Medicare Parts A and B. Further, all Medicare beneficiaries may purchase coverage for outpatient prescription drugs under Medicare Part D, and some Medicare Advantage plans also include Part D coverage. The fee-for-service portion of the Medicare program (Parts A and B) processes approximately a billion claims each year from about 1.5 million providers who deliver and bill Medicare for health care services and supplies. In delivering patient care, providers need to not only ensure that claims for services covered by Medicare and other health care insurers are submitted correctly, but to also ensure that beneficiaries receive benefits to which they are entitled. To do this, these providers need access to accurate and timely eligibility information to help them determine whether and how to properly submit claims for payment to Medicare and other insurers on behalf of their patients. Many health care insurers have implemented information technology systems to help providers make this determination at the time services are being delivered--that is, at the point of care--by providing electronic data on a real-time basis regarding patients' benefits covered by their insurance plans. To assist providers with verifying beneficiaries' eligibility for services under Medicare, and in response to HIPAA requirements, CMS provided an electronic mechanism that allowed providers to access real-time data at the point care is scheduled or delivered. To meet this requirement, CMS officials stated that they implemented the initial version of HETS in May 2005. CMS's Business Applications Management Group and the Provider Communications Group are the system and business owners of HETS. As such, these groups are responsible for the development, implementation, maintenance, and support of the system, as well as establishing business rules regarding the use of the system application, such as agreements regarding the use and protection of the data provided by HETS. CMS awarded cost-plus-award-fee contracts to two contractors to assist the agency with developing and maintaining HETS, performing independent testing, production support, help desk, and project integration services. HETS operates from CMS's data center in Baltimore, Maryland, and is accessed by users via the CMS extranet. The system is comprised of software that processes query and response transactions, along with hardware, such as servers that support connections with users' facilities and the internet, and devices that store the data provided by the system. The system software is designed to process transactions according to standards and formats defined by HIPAA. It was designed to allow the release of patients' data to Medicare providers, or their authorized billing agents, to support their efforts to complete accurate Medicare claims when determining beneficiaries' liability and eligibility for specific services. CMS officials stated that the agency does not receive any payments for the use of HETS, nor does the agency require Medicare providers to use HETS to verify eligibility prior to filing claims CMS intended for HETS to be used by health care providers; health care clearinghouses, which are entities that provide electronic data exchange services for their customers; and Medicare Administrative Contractors (MACs) that assist CMS in processing claims. Health care providers may request beneficiary eligibility data from HETS directly via CMS's extranet or by utilizing the services of clearinghouses. According to clearinghouse officials with whom we spoke, many providers use clearinghouses to conduct transactions with HETS because they may not have the technical capability to connect directly to CMS's extranet, or they may chose to employ the services of clearinghouses for financial or other reasons. For example, these providers may use clearinghouses to conduct electronic transactions with CMS and other different payers' systems, and avoid expenses associated with establishing and maintaining the in-house technology and expertise needed to connect with multiple systems. Rather, they can conduct these transactions by establishing one connection with a clearinghouse. However, the MACs access HETS via CMS's extranet. In all cases, users gain access to the extranet through a vendor-supplied network service. According to documented system descriptions, when requesting information from HETS, a user initiates a transaction by entering data into its workstation using software systems installed within its facility. The end- users' systems may be developed in-house by individual providers, clearinghouses, or MACs, or by commercial software vendors. The data entered into the workstation identify the provider, beneficiary, and services for which eligibility is to be verified. The data are translated by the end-user software into the standard HIPAA transaction format, then transmitted from the user's workstation to the HETS system via either the agency's extranet, or the vendor-supplied network service which connects to the CMS extranet. The system validates the incoming data and, if the request is valid, returns response data back to the user's workstation. If the request data are not valid, the system responds with error codes that indicate the type of error detected in the request data. Responses are transmitted from HETS in the HIPAA format and translated by the users' software before being presented. According to reports provided by program officials, the number of HETS transactions has grown each year since its initial implementation in May 2005. The business and system owners with whom we spoke attributed the growth primarily to increases in the number of new users of HETS, particularly during the first 2 years of implementation, and the growth in the number of Medicare beneficiaries. Nonetheless, while the number of transactions has continued to increase, the annual rate of increase in transaction volume has declined since the system's initial implementation. Table 1 shows HETS utilization, measured by the number of incoming transactions processed each fiscal year, from its initial implementation in May 2005 through fiscal year 2011. CMS's internal operational requirements for HETS established a goal for the system to respond to query transactions in 5 seconds or less. According to program officials, from 2005 to 2010, HETS responded to transaction inquiries well within this goal. However, reports of the system's performance showed that beginning in January 2010, response times began to exceed 5 seconds and progressively worsened throughout most of the year. CMS attributed this performance degradation to outdated software and increases in the number of eligibility verification transactions submitted to the extent that the volume exceeded the hardware capacity. The business and system owners with whom we spoke stated that in July 2010 they began to implement a series of major improvements to the HETS operating environment and system, including hardware and software upgrades. However, users continued to experience lengthy response and system down times. Program officials stated that in January 2011 they took additional steps to address the slow response and system availability problems. In this case, they doubled the hardware capacity, replaced the operating system, and upgraded the system's software. According to these officials, the revisions, upgrades, and replacements were more complex than expected and were not fully implemented until April 2011. Subsequently, from mid April 2011 to May 2011, CMS conducted a phased migration of HETS users to the upgraded system. Because HETS processes and transmits personal information related to individuals' Medicare program eligibility, the system is subject to federal requirements for protecting the personally identifiable health information. In this regard, the Privacy Act of 1974 regulates the collection, maintenance, use, and dissemination of personal information by federal government agencies. It also prohibits disclosure of records held by a federal agency or its contractors in a system of records without the consent or request of the individual to whom the information pertains unless the disclosure is permitted by the Privacy Act. The Privacy Act includes medical history in its definition of a record. Other federal laws and regulations further define acceptable use and disclosure activities that can be performed with individually identifiable health information, known as protected health information. These activities include--provided certain conditions are met-- treatment, payment, health care operations, and public health or research purposes. For example, HIPAA and its implementing regulations allow the entities they cover to use or disclose protected health information for providing clinical care to a patient.associates, such as medical professionals, pharmacies, health These covered entities and their business information networks, and pharmacy benefit managers, work together to gather and confirm patients' electronic health information that is needed to provide treatment, such as a beneficiary's eligibility, benefits, and medical history. Key privacy and security protections associated with individually identifiable health information, including information needed by providers to verify patients' eligibility for coverage by Medicare or private health plans, are established under HIPAA. Key privacy principles associated with individually identifiable health information, including information needed by providers to verify patients' eligibility for coverage by Medicare of private health plans, are reflected in HIPAA's Administrative Simplification Provisions provided for HIPAA.the establishment of national privacy and security standards, as well as the establishment of civil money and criminal penalties for HIPAA violations. HHS promulgated regulations implementing the act's provisions through its issuance of the HIPAA rules. Specifically, the HIPAA Privacy Rule regulates covered entities' use and disclosure of protected health information. Under the Privacy Rule, a covered entity may not use or disclose an individual's protected health information without the individual's written authorization, except in certain circumstance expressly permitted by the Privacy Rule. These circumstances include certain treatment, payment, and other health care operations. As such, the disclosure of beneficiary eligibility information by HETS is permitted in accordance with the rule since it is used in making treatment and payment decisions. The HIPAA Privacy Rule reflects basic privacy principles for ensuring the protection of personal health information, such as limiting uses and disclosures to intended purposes, notification of privacy practices, allowing individuals to access their protected health information, securing information from improper use or disclosure, and allowing individuals to request changes to inaccurate or incomplete information. The Privacy Rule generally requires that a covered entity make reasonable efforts to use, disclose, or request only the minimum necessary protected health information to accomplish the intended purpose. In addition to the Privacy Act and the HIPAA Privacy Rule, the E- Government Act of 2002 includes provisions to enhance the protection of personal information in government information systems. the act requires federal agencies to conduct privacy impact assessments to determine the impact of their information systems on individuals' privacy. The act also states that the assessment should be completed to analyze how information is to be handled and to evaluate needed protections and alternative processes for handling information in order to mitigate potential privacy risks. After experiencing performance problems throughout 2010, HETS is currently operating on a real-time basis and with few user concerns being noted. As of June 2012, CMS reported that 244 entities were using the system; these included 130 providers, 10 Medicare Administrative Contractors, and 104 clearinghouses that conduct query and response The agency further reported transactions for about 400,000 providers.that, during the first 6 months of 2012, the system processed more than 380 million transactions from these users. System performance data showed that, since May 2011, HETS has been consistently providing service to its users 24 hours a day, 7 days a week, except during regularly scheduled maintenance periods, which occur on Monday mornings from midnight until 5:00 a.m. (CMS sometimes schedules additional outages for system maintenance and upgrades, usually during one or two weekends each month.) E-Government Act of 2002, Pub L. No. 107-347, Dec. 17, 2002, codified at 44 U.S.C. SS 3501 note. occurring between 8:00 a.m. and 4:00 p.m. eastern time, Monday through Friday. About 90 percent of these transactions were initiated by the clearinghouses. Daily reports of system performance that were generated by the system showed that the average response time for 99 percent of the transactions was less than 3 seconds during the first 6 months of 2012. Appendix II provides our detailed analysis of the system's transaction volumes and response times from January 2010 through June 2012. Users of the system told us that since CMS completed hardware and software improvements in spring 2011, they have been satisfied with its operational status. They stated that they are not currently experiencing operational or communication issues. Records of contacts with CMS's help desk regarding the operational status of HETS show that the number of calls by users declined from an average of 133 calls per week during the first quarter of 2011 to an average of 64 per week during the second quarter of 2012. The users also stated that health care insurers in the commercial sector conduct electronic eligibility verifications in a manner similar to that of CMS. They told us that, based on their experiences with using those insurers' systems, HETS provides faster response times as well as more complete information and reliable service than the other beneficiary eligibility verification systems they use. CMS's efforts to correct operational problems experienced with HETS in 2010 and early 2011 led to improved performance and overall user satisfaction with the system. To ensure that the agency is able to maintain performance that satisfies users and meets goals for response and system availability times, HETS program officials have taken steps to provide ongoing support for users through help desk procedures, system status notifications, and management of contractors based on incentive awards for performance that exceeds contractual requirements. Additionally, these officials have begun to plan for improvements and enhancements to the system in efforts to position themselves to meet future demands on the system as they projected transaction volume to increase at a rate of about 40 percent a year. Among other improvements, the officials described plans to redesign the system and upgrade hardware, and to establish service level agreements with HETS users. CMS has taken various steps to improve the operational status of HETS and to ensure user satisfaction with its performance. With regard to ensuring the availability of the system, CMS notifies users of the status of operations on a daily basis and whenever a change in status occurs. For example, CMS contractors perform daily health checks each morning to determine the status of HETS. If system performance or availability issues are identified, help desk contractors post messages to that effect on the system website and a trouble ticket is opened. The appropriate staff is assigned to troubleshoot and resolve the issues. Additionally, when users have complaints or issues related to the system's operations, they are instructed to contact the help desk. Upon receipt of the problem, the help desk staff are to triage the problem and generate a ticket if the problem cannot be resolved at the help desk level. For example, if a user is unable to access the system and contacts the help desk, staff are to determine if the problem is an operational issue or is an issue with the user or another component of the system, such as the network services provided by a vendor. They are to then track the issue until the problem is resolved. According to HETS program officials, problems are generally reported when the system response time begins to slow down. CMS's help desk contractors who support HETS post announcements on the agency's website and send e-mails to notify users when the system is to be brought down to allow corrections to system operation problems, or to perform upgrades or maintenance. The contractors post a second announcement and send e-mails to notify users when the system becomes available after an outage. The past 6 months' help desk announcements on the HETS website showed that additional maintenance or system upgrades were performed outside the scheduled maintenance period. Specifically, during this time CMS notified users that maintenance would be performed one to two times per month on weekends, with the system down from as few as 6 hours to as many as 3 days. In most cases, CMS sent a notice to its HETS users 2 weeks in advance of the outages. In discussions with provider, clearinghouse, and MAC users, two of the users expressed concerns with the frequency that CMS conducts maintenance outside the scheduled maintenance time. These users stated that they do not have access to the system for 1 day three to four weekends per month. However, one of these users, a provider, told us that during these times the system was accessible via an alternate portal, which indicated that HETS was operational and likely not a cause of the problem. A clearinghouse user stated that, while these outages are inconvenient, CMS notifies users well in advance of the outages and that there are some times during the announced outages when transactions can be processed. All the users with whom we spoke told us that the CMS help desk notified them in advance of any unscheduled system outages that were planned in addition to the regularly scheduled maintenance downtime. CMS has also taken steps to ensure that its contractors meet quality and service requirements related to the development, maintenance, and support of HETS. Program officials told us that the contractors' performance is reviewed and evaluated every 6 months in addition to annual evaluations, based on measures for overall technical performance and management. The evaluations identify strengths and weaknesses noted during the evaluation periods. The contractors may be awarded financial incentives for exceeding performance expectations in certain categories, such as software maintenance and support for the system's operations. For example, a May 2012 report on the results of the most recent 6-month evaluation of the help desk contractor's performance documented its strengths and weaknesses. The report showed that program officials were satisfied with the contractor's efforts to meet measures in technical performance and, therefore, provided the full financial incentive. However, they noted weaknesses in one category for which the contractor did not receive the full incentive amount. In this case, the contractor failed to deliver required reports and identify infrastructure changes that impacted the implementation of HETS. Additionally, a November 2011 report on the development contractor's performance showed similar results. In both reports, program officials stated overall satisfaction with the contractors' performance and noted areas of needed improvements. To help ensure the current level of service is sustained during projected increases in transaction volumes, the system owners have initiated various activities aimed at helping to prevent operational problems similar to those experienced with the system in 2010 and early 2011. In this regard, CMS projected the increase in transaction volume to continue at a rate of about 40 percent for the next several years. This increase is expected in part because of the discontinuance of some providers' use of other means to obtain eligibility information from CMS and the migration of that user population to HETS by the end of March 2013. Program officials also anticipate that more Medicare Administrative Contractors will begin to offer beneficiary eligibility verification services to the providers they support and will use HETS to conduct these verifications. The system and business owners described steps they took in 2011 and 2012 that were intended to help plan for future increases in the number of transactions. In March 2011, CMS tasked its HETS development contractor to prepare a plan and process for long-term improvements to the system and its operating environment. The agency tasked an additional contractor to evaluate the existing architecture, monitoring tools, and the extent to which the existing system platform could be scaled to meet future requirements. This contractor was also tasked to propose and analyze alternatives for future system implementation and recommend future service levels, monitoring tools, and practices for managing the application. In July 2011, CMS released a Request for Information to obtain knowledge and information of current marketplace solutions that may meet future needs. As stated in the request, this action was intended to compile information that would assist CMS in the identification of potential options for creating an enterprise-level health care eligibility inquiry system that would support both real-time and batch transaction exchanges. In August 2011, 12 companies responded to the request and provided information on how their existing products could address CMS requirements. CMS analyzed the responses to the Request for Information and concluded that while 3 of the companies provided information that was not useful, others offered a range of products that CMS could consider when they begin to survey the marketplace for viable products and solutions for a future implementation of HETS. In January 2012, the two contractors completed the evaluations that were initiated in March 2011 and submitted reports that included recommendations regarding steps needed to accommodate projected eligibility transaction volumes while maintaining appropriate availability, security, and costs of HETS operations. The first report stated the existing architecture is sufficient to handle current transaction volumes and, with minor changes, should be able to handle transaction volumes anticipated for the next 2 years. The report also included recommendations to address the increases in transaction volume projected beyond the next 2 years. For example, the contractor who conducted the evaluation recommended that CMS reassess and change the architecture as transaction volumes grow, and automate routine processes, including troubleshooting practices and application start-up and shutdown procedures. This contractor also recommended that CMS establish service level agreements with its users to define and agree upon service parameters for HETS, including system availability and performance. The second contractor's report provided technical evaluations of six commercial-off-the-shelf products that were capable of meeting future estimated transaction volumes and presented recommendations for three alternate solutions, spelling out the strengths and weaknesses of each. Program officials stated that they agree with the recommendations identified in the contractors' reports and are making plans to address many of them in the near term. Specifically, they are planning to automate some processes, such as the application start-up and shutdown procedures. Additionally, HETS business owners stated that they are currently working to establish and document service level agreements with users, as recommended by one of the evaluation contractors. They plan to complete this activity and have agreements in place by January 2013. The officials we spoke with also described several technical improvements they intend to take to increase the system's capacity to handle growing numbers of transactions, including some consistent with the contractors' evaluations. For example, according to CMS's plans for modifying and improving the system through 2015, in fiscal year 2011 CMS began to plan for development of a redesigned system to be completed by the end of June 2014. The agency awarded a contract for defining and writing requirements for the redesigned system in June 2012. Among other capabilities, as part of the system redesign CMS plans to implement batch processing of transactions in addition to the According to HETS business owners, this current real-time process.capability is needed to support users' needs since some clearinghouses receive batch files from providers and have to convert them for real-time submission. The implementation of batch processing capabilities within the system will remove the need for clearinghouses to take this extra step. Among several other initiatives to be conducted are plans to procure a contract for maintenance of the current system until the redesign is complete. This activity is necessary because the terms of the current contract expire at the end of September 2013 and the system redesign is not planned to be complete until the end of June 2014. CMS's plans also identified a step to, by the end of August 2012, migrate the current HETS database to a new operating platform that is scalable to accommodate the expected increase in transaction volume. Further, agency officials stated that while they plan to make these improvements to the system over the next 3 years, their ability to conduct the activities they have planned is dependent on the agency's budget. These officials stated that, to mitigate risks associated with the level of funding the program receives in the future, they prioritized improvements planned for the existing system and began to implement those that they determined to be the most cost-effective during this and early next fiscal year. Among other things, these include activities to support the current system until the redesigned system is implemented, including development of tools that enable the HETS contractors to proactively monitor system components, additional services to enhance production capacity, and automated processes for starting up and shutting down the application. Program officials stated that they will review and prioritize other activities for improving the system as part of the HETS redesign project. The Privacy Act of 1974 and the HIPAA Privacy Rule protect personally identifiable health information, such as Medicare beneficiary information, to ensure that it is disclosed only under specified conditions and used only for its intended purpose. In accordance with these privacy protections, the information provided by HETS is to be used only for confirming eligibility of patients to receive benefits for services provided under the Medicare fee-for-service program. CMS is governed by the Privacy Act and all covered entities that use HETS--health care providers, clearinghouses, and Medicare contractors--are required to comply with the HIPAA Privacy Rule. In accordance with provisions of the Privacy Rule, the protected health information provided by HETS is to be disclosed and used only for certain activities. Among other activities, these include treatment of patients and payment for services--the activities supported by the use of HETS. CMS has taken actions intended to ensure that the personal health information sent to and from the system is protected from misuse and improper disclosure. For example, CMS documented in the HETS Rules of Behavior that users must adhere to the authorized purposes for requesting Medicare beneficiary eligibility data. Specifically, the rules state that users are authorized to request information to determine whether patients who were determined to be Medicare eligible are covered for specific services that are to be provided at the point of care. However, users are not authorized to request information for the sole purpose of determining whether patients are eligible to receive Medicare benefits. According to program officials, CMS enforces its rules of behavior by monitoring inquiries to identify behaviors that may indicate intentional misuse of the data. For example, inquiries from one user that result in high rates of errors or a high ratio of inquiries compared to the number of claims submitted may indicate that a user is searching the system to identify Medicare beneficiaries rather than using HETS for its intended purpose. Users engaging in these types of behavior may be contacted or, when appropriate, referred for investigation for inappropriate use of the data, such as health care identity theft or fraudulent billing practices. Additionally, system documentation described mechanisms that were implemented to prevent access by requesters with invalid provider identifications or certain providers who have been excluded or suspended from participating in the Medicare program. For example, CMS maintains databases of National Provider Identifiers, another HIPAA standard. The eligibility request transactions submitted by HETS users include these identifiers, and, before providing beneficiary data in response to requests, the system validates the identifiers against data stored in an agency database. Additionally, according to the HETS business owners, providers who have been identified by HHS's Office of Inspector General and the General Services Administration as ones conducting activities In intended to defraud Medicare may be included on a "do not pay" list.this case, providers excluded from the program would not "need to know" information about patients' personal health, including whether or not they are eligible for Medicare benefits. According to HETS officials, these data are also incorporated into the National Provider Identifier database that is used to validate identifiers submitted to HETS and, as a result, these excluded providers are also not allowed to receive information from the system. HETS system documentation also described mechanisms for securing the data transmitted to and from HETS. For example, access to the system is only allowed through CMS's secured extranet. To gain access, the providers and clearinghouses must first submit a Trading Partner Agreement. In addition to including information needed to enable CMS and its trading partners, or users, to establish connectivity and define data exchange requirements, the agreement defines responsibilities for securing the data of the entities receiving beneficiary eligibility information from CMS. After users submit the agreement, CMS contacts them to authenticate their identity and, once authentication has been determined, CMS help desk staff provide the requester with a submitter ID that is required to be included on all transactions. Users then may request access to the CMS extranet from one of four network service vendors which establish a secure software connection to the system. The table below summarizes these and other actions CMS described that address key HIPAA privacy principles relevant to the implementation of HETS. Further, the E-Government Act of 2002 requires federal agencies to conduct privacy impact assessments, and the Office of Management and Budget (OMB) provides guidance to agencies conducting these assessments. The act and OMB's implementing guidance require that these assessments address: (1) what information is to be collected; (2) why the information is being collected; (3) the intended use of the information; (4) with whom the information will be shared ; (5) what opportunities individuals have to decline to provide the information or to consent to particular uses of the information, and how individuals can grant consent; (6) how the information will be secured ; and (7) whether a system of records is being created under the Privacy Act. According to the OMB guidance, agencies should conduct a privacy impact assessment before developing or procuring IT systems or projects that collect, maintain, or disseminate information in identifiable form from or about members of the public. Agencies are required to perform an update as necessary when a system change creates new privacy risks. Additionally, in a previous report, we identified the assessment of privacy risks as an important element of the privacy impact assessment process to help officials determine appropriate privacy protection policies and techniques to implement those policies. We noted that a privacy risk analysis should be performed to determine the nature of privacy risks and the resulting impact if corrective actions are not in place to mitigate those risks. CMS conducted a privacy impact assessment of HETS as called for by the E-Government Act, and updated the assessment in April 2011. The assessment addressed the seven OMB requirements for implementing privacy provisions. For example, in addressing how HETS information would be secured, it stated that the system is accessible only via the CMS private network to authorized users. The assessment also stated that the intended use of the system is to allow providers to confirm patients' enrollment in the Medicare program and provide information that is needed to correctly bill for payment of claims. Additionally, as part of a security risk assessment, program officials also completed a privacy risk analysis of the system that addressed several privacy risks. For example, CMS assessed privacy risks related to improper disclosure of the protected health information processed by HETS and determined that the risk level was low to moderate. By establishing practices and procedures intended to protect the privacy of Medicare beneficiaries' personal health information, and assessing the impact and risks associated with the use of HETS, CMS took required steps to address privacy principles reflected by HIPAA, the HIPAA rules, and the Privacy Act and has acted in accordance with OMB's guidance for protecting personally identifiable information. According to officials in HHS's Office for Civil Rights, no violations of the HIPAA Privacy Rule resulting from the use and disclosure of data provided by HETS have been reported since the system was implemented. In written comments on a draft of this report, signed by HHS's Assistant Secretary for Legislation (and reprinted in appendix III), the department stated that it appreciated the opportunity to review the report prior to its publication. The department added that it regretted the poor service that resulted from operational problems in 2010 and early 2011 and that it is continuing to take steps to maintain and improve the performance of the system. The department also provided technical comments, 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 to interested congressional committees, the Secretary of HHS, the Administrator of CMS, and other interested parties. In addition, the report will be available at no charge on the GAO website at http://www.gao.gov. If you or your staff have any questions about this report, please contact me at (202) 512-6304 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. GAO staff who made key contributions to this report are listed in appendix IV. Our objectives were to (1) identify the operational status of HETS, (2) identify any steps CMS has taken to ensure users' satisfaction and plans to take to ensure the performance of the system supports future requirements, and (3) describe CMS's policies, processes, and procedures for protecting the privacy of beneficiary eligibility data provided by the system. To identify the operational status of HETS, we collected and analyzed documentation from program officials that described the use and daily operations of the system, such as reports on incoming transaction volume, response time, and downtime, along with documents that describe outcomes of the system, such as reported problems. To determine whether CMS provided the level of service agreed upon with HETS users, we compared the information we collected to business requirements defined in program and system plans, and to any agreements with users. Additionally, we obtained users' views of the extent to which the current implementation of HETS satisfied their needs for timely information by holding structured interviews with selected representatives of providers; clearinghouses, which provide services for about 90 percent of Medicare providers; and a Medicare Administrative Contractor who used the system. The selected HETS users included three clearinghouses; two fee-for- service providers, including a visiting nurse agency and a medical equipment supplier; and one Medicare Administrative Contractor. Based on data provided by system performance reports for the week of March 12th through the 18th 2012, we selected the highest volume users among each user type throughout the United States. The selected users submitted about 44 percent of the 14.5 million total transactions processed during the selected period of time. Specifically, the clearinghouses submitted a total of about 40 percent of the transactions, the Medicare contractor submitted about 2 percent, and the provider and supplier submitted less than 1 percent of the transactions, respectively. We discussed with the users their experiences and satisfaction with the level of service the system has provided over the last 2 years, and the results of CMS's efforts to resolve any problems or system-related issues. In addition, we interviewed program officials knowledgeable of the management of the program to gain additional understanding of the agency's practices for defining performance requirements for HETS contractors, and for managing and assessing their performance relevant to ensuring efficient operations of HETS. We also discussed with the users their experiences with other automated eligibility verification systems provided by commercial health insurers. We held these discussions to determine whether these officials could share any lessons that could be beneficial to CMS in operating HETS. To identify the steps that CMS has taken to ensure that HETS users remain satisfied with the performance of the system and that the agency plans to take to ensure the system provides the level of service needed to support future requirements, we reviewed agency documents, such as project timelines and system release notes, and reports of users' calls to the help desk. These documents described steps taken to address problems reported by users, identified systems modifications to correct problems, and showed patterns in the numbers of help desk calls over the past 2 years. We also identified steps the agency initiated to help alleviate problems introduced by increasing transaction volume as the number of Medicare beneficiaries has increased over the past 2 years. Further, through our review of relevant agency documents, contractors' performance reports, and discussions with program officials, we identified steps CMS took to assess contractors' performance toward providing efficient and quality service to users of HETS, and any necessary corrective actions. Additionally, we identified steps the agency plans to take toward defining and addressing future requirements of the system that may be introduced by increasing numbers of verification inquiries, and collected and reviewed documentation that provided information about projected growth in transaction volume as providers were faced with the need to conduct HETS queries of more patients filing Medicare claims. We also collected available program planning documentation that described long-term plans for the system and assessed these plans against projections of future requirements and recommendations from independent studies of CMS's implementation of HETS. Finally, to describe the policies, processes, and procedures established by CMS to ensure that the privacy of beneficiary eligibility data is protected, we evaluated agency documentation such as HETS privacy impact and risk assessments, and agreements with users that describe CMS's and users' responsibilities and requirements for protecting the data processed and provided by the system. We compared the information from these documents to requirements and privacy practices derived from provisions of the Privacy Act and the HIPAA Privacy Rule. We also held a discussion with an official with HHS's Office for Civil Rights to determine whether any complaints related to the use of HETS had been noted. In conducting our work, we did not review or test controls implemented by the agency to secure the data processed by HETS. We supplemented data collection for all objectives with interviews of agency officials, including system and business owners, who were knowledgeable of the system's operations and improvements, contract management and oversight, and requirements and practices for protecting the privacy of personal health information. Among these officials, we held discussions with directors in CMS's Provider Communications Group and the Business Applications Management Group, Office of Information Services. We used computer-maintained data provided by CMS program officials when addressing our first objective, and we determined the reliability of these data by obtaining corroborating evidence through interviews with agency officials who are knowledgeable of the operations of the system and its user population. We also conducted a reliability assessment of the data provided by CMS. We found the data sufficiently reliable for the purposes of this review. HETS program officials provided system-generated data that reflected the performance of the system in terms of the numbers of transactions processed each month and the response time in four categories. The data were provided for the time period beginning in January 2010, when the operational problems began to occur, through June 2012. Table 1 shows the percentage of transactions that received responses from HETS in less than 3 seconds increased from 60.8 percent to 99.9 percent during this time period. In addition to the contacts named above, Teresa F. Tucker, Assistant Director; Tonia D. Brown; LaSherri Bush; Sharhonda Deloach; Rebecca Eyler; and Monica Perez-Nelson made key contributions to this report.

Medicare is a federal program that pays for health care services for individuals 65 years and older and certain individuals with disabilities. In 2011, Medicare covered about 48.4 million of these individuals, and total expenditures for this coverage were approximately $565 billion. CMS, the agency within the Department of Health and Human Services that administers Medicare, is responsible for ensuring that proper payments are made on behalf of the program's beneficiaries. In response to HIPAA requirements, CMS developed and implemented an information technology system to help providers determine beneficiaries' eligibility for Medicare coverage. In May 2005 CMS began offering automated services through HETS, a query and response system that provides data to users about Medicare beneficiaries and their eligibility to receive payment for health care services and supplies. Because of the important role that HETS plays in providers having access to timely and accurate data to determine eligibility, GAO was asked to (1) identify the operational status of HETS, (2) identify any steps CMS has taken to ensure users' satisfaction and plans to take to ensure the system supports future requirements, and (3) describe CMS's policies, processes, and procedures for protecting the privacy of data provided by HETS. To do so, GAO collected and analyzed documentation from program officials, such as reports on transaction volume and response times, agreements with users, and CMS's privacy impact and risk assessments of HETS. GAO also interviewed program officials and system users. The Centers for Medicare and Medicaid Services (CMS) currently offers to Medicare providers and Medicare Administrative Contractors the use of the Health Insurance Portability and Accountability Act of 1996 (HIPAA) Eligibility Transaction System (HETS) in a real-time data processing environment. HETS is operational 24 hours a day, 7 days a week, except during regularly scheduled maintenance Monday mornings, from midnight until 5:00 a.m., and when CMS announces other maintenance periods during one or two weekends each month. According to program officials, 244 entities were using HETS in 2012, including about 130 providers, 104 clearinghouses that provide data exchange services to about 400,000 health care providers, and 10 Medicare contractors that help CMS process claims for services. From January through June 2012, HETS processed each month an average of 1.7 million to 2.2 million queries per day with most of the queries submitted between the hours of 8:00 a.m. and 4:00 p.m. eastern time. The users with whom we spoke confirmed that operational problems they experienced with the system in 2010 and the first few months of 2011 were resolved in spring 2011 after CMS implemented several hardware and software replacements and upgrades. System performance reports for the first 6 months of 2012 showed that the average response time per transaction was less than 3 seconds. Users described experiences with the system that were consistent with these data. They told us that they are currently satisfied with the operational status of HETS and that the system provides more complete information and reliable service than other systems that they use to verify eligibility with commercial health insurers. CMS took steps to ensure users remain satisfied with the system's performance, including notifying users in advance of system downtime, providing help desk support, and monitoring contractors' performance. The agency had also planned several technical improvements intended to increase HETS' capacity to process a growing number of transactions, which the agency projected to increase at a rate of about 40 percent each year. These plans include a redesign of the system and migration to a new database environment that is scalable to accommodate the projected increase in transaction volume. According to HETS program officials, near-term plans also include the implementation of tools to enable proactive monitoring of system components and additional services intended to enhance production capacity until the planned redesign of the system is complete. To help protect the privacy of beneficiary eligibility data provided by HETS, CMS established policies, processes, and procedures that are intended to address principals reflected by the HIPAA Privacy Rule. For example, in its efforts to ensure proper uses and disclosures of the data, CMS documented in user agreements the authorized and unauthorized purposes for requesting Medicare beneficiary eligibility data. Additionally, the agency conducted privacy impact and risk assessments of HETS as required by the E-Government Act of 2002. Officials from the Department of Health and Human Services' Office for Civil Rights stated that no privacy violations had been reported regarding the use of the protected health data provided by HETS since its implementation in 2005.

FAR Part 15 allows the use of several competitive source selection processes to meet agency needs. Within the best value continuum, DOD may choose a process that it considers the most advantageous to the government, either the LPTA or the tradeoff process (see figure 1). DOD may elect to use the LPTA process where the requirement is clearly defined and the risk of unsuccessful contract performance is minimal. In such cases, DOD may determine that cost or price should play a dominant role in the source selection. When using the LPTA process, DOD specifies its requirements in the solicitation. Contractors submit their proposals and DOD determines which of the contractors meet or exceed those requirements, no tradeoffs between cost or price and non-cost factors are permitted, and the award is made based on the lowest price technically acceptable proposal submitted to the government. By contrast, DOD may elect to use a tradeoff process in acquisitions where the requirement is less definitive, more development work is required, or the acquisition has a greater performance risk. In these instances, non-cost evaluation factors, such as technical capabilities or past performance, may play a dominant role in the source selection process. Tradeoffs among price and non-cost factors allow DOD to accept other than the lowest priced proposal. The FAR requires DOD to state in the solicitation whether all evaluation factors other than cost or price, when combined, are significantly more important than, approximately equal to, or significantly less important than cost or price. In October 2010, we reported that DOD used best value processes for approximately 95 percent of its new, competitively awarded contracts in which $25 million or more was obligated in fiscal year 2009. DOD awarded approximately 26 percent using the LPTA process and 69 percent using the tradeoff process. DOD awarded the remaining 5 percent using sealed bidding, which is a competitive process where award is made to the responsible bidder whose bid conforms to the invitations for bid and is most advantageous for the government considering only price and price-related factors included in the solicitation. At that time, we found that the majority of the contracts were awarded using a tradeoff process in which all evaluation factors other than cost or price, when combined, were significantly more important than cost or price. Our analysis showed that DOD considered past performance and technical capability evaluation factors as the most important among the non-cost factors. Further, we found using a tradeoff process can be more complex and take more time than other source selection methods, and requires that acquisition staff have proper guidance, needed skills, and sound business judgment. While DOD and the military departments had taken steps to improve source selection procedures, acquisition personnel noted a lack of training to assist them in deciding whether or not a price differential is warranted when making tradeoff decisions. We recommended that to help DOD effectively employ best value tradeoff processes, DOD develop training elements, such as case studies, that focus on reaching tradeoff decisions, as it updates its training curriculum. DOD concurred and implemented the recommendation in August 2012. DOD issued new guidance that emphasizes affordability and standardization of best value processes since our analysis of fiscal year 2009 contracts. In September 2010, the Under Secretary of Defense for Acquisition, Technology, and Logistics (USD(AT&L)) issued a memorandum that established its Better Buying Power Initiative to obtain greater efficiency and productivity in defense spending. In its memorandum, USD(AT&L) emphasized that DOD must prepare to continue supporting the warfighter through the acquisition of products and services in potentially fiscally constrained times. USD(AT&L) noted that DOD must "do more without more." In April 2013, USD(AT&L) issued another memorandum to update the Better Buying Power Initiative. This memorandum identifies seven areas USD(AT&L) is pursuing to increase efficiency and productivity in defense spending. One area is incentivizing productivity and innovation in industry and government. As part of this guidance, USD(AT&L) states that "best value" in a competitive source selection should generally indicate that the government is open to paying more (up to some amount) than the minimum price bid in return for a product that provides more than the minimum needed performance. In addition, USD(AT&L) states that LPTA should be used in situations where DOD would not realize any value from a proposal exceeding its minimum technical or performance requirements and that another process should be used when standards of performance and quality are subjective. A second area of this guidance includes improving the professionalism of the total acquisition workforce. DOD has previously reported that training is a critical element of improving and sustaining a high quality workforce with the right skills and capabilities. USD(AT&L) also issued source selection procedures in March 2011 to standardize the methodology and process that DOD uses to conduct competitively negotiated source selections. For example, USD(AT&L) outlined a common set of principles and procedures for conducting acquisitions using the best value processes including the use of standardized rating criteria and descriptions for technical capability and past performance factors. Further, similar to information presented in the Better Buying Power Initiative, USD(AT&L) stated in the procedures that the LPTA process may be used in situations where the government would not realize any value from a proposal exceeding minimum technical or performance requirements, often for acquisitions of commercial or non-complex services or supplies which are clearly defined and expected to be low risk. In its April 2013 memorandum updating the Better Buying Power Initiative, USD(AT&L) directed the director of Defense Procurement and Acquisition Policy to update the guidance to describe the characteristics of a technically acceptable solution by July 1, 2013. As of July 2014, DOD officials are coordinating comments on a draft revision of the guidance. The Defense Procurement and Acquisition Policy official in charge of the revision told us the original due date of July 1, 2013 was established before they decided to do a more comprehensive update of the guidance, which has contributed to the date slipping for its completion. During the time that USD(AT&L) issued these initiatives and guidance-- specifically, between fiscal years 2009 and 2013--DOD experienced a number of changes in its contracting activity, including: Total obligations for products and services decreased from $380 billion in fiscal year 2009 to $310 billion in fiscal year 2013, Obligations on new, competed contracts decreased from $70 billion in fiscal year 2009 to $43 billion in fiscal year 2013, and Obligations on new, competed contracts of $25 million or more decreased from $39 billion in fiscal year 2009 to $24 billion in fiscal year 2013. See figure 2 for our analysis of DOD's contract obligations from FPDS-NG for fiscal year 2013. Even though DOD's obligations decreased between fiscal year 2009 and 2013, it did acquire a similar mix of products and services in both years. In addition, the percentage of commercial items purchased in those 2 fiscal years was approximately the same. DOD predominately used best value processes--tradeoff and LPTA--to evaluate offers from potential vendors in fiscal year 2013. DOD used best value processes for approximately 93 percent of the 2,851 new, competed contracts for which it had obligated over $1 million in fiscal year 2013 and used sealed bid for approximately 7 percent. For contracts with obligations of $25 million or more, DOD used the tradeoff process for approximately 58 percent of the contracts and the LPTA process for approximately 36 percent of the contracts. For contracts with obligations over $1 million and less than $25 million, DOD used tradeoff and LPTA at about the same overall rate--47 percent and 45 percent, respectively. In our sample of 171 contracts that used best value processes, DOD used tradeoff for 96 contracts and LPTA for 75 contracts. We found some variation in terms of what process was used to acquire products and services at the different thresholds we reviewed (see figure 3). As seen in the above figure, DOD used the tradeoff process most often in our sample to acquire services, including those related to construction projects, aircraft maintenance, and other support services, regardless of obligation amount. For contracts with obligations of $25 million or more, DOD used the LPTA process primarily to acquire commercial products such as fuel. In contrast, for contracts with obligations over $1 million and less than $25 million, DOD used the LPTA process to acquire a mix of products and services, including fuel, aircraft parts, computer equipment, construction-related services, engineering support services, and ship maintenance and repairs. The desire to weigh non-cost factors such as technical approach and past performance was a key factor cited in the majority of the solicitations issued for the 96 contracts in our sample that DOD awarded using the tradeoff process, regardless of obligation value (see table 1). For the 76 contracts for which non-cost factors were more important than price, DOD acquired both products and services, such as computer equipment, aircraft maintenance services, and communication network support services.and past performance were the factors most often identified as more important than price among the non-cost factors. For example, 48 out of the 76 contracts in our sample identified technical approach as the most important factor. Additionally, 23 out of the 76 contracts in our sample identified past performance as the most important factor. Other non-cost factors considered in some of the solicitations with much less frequency than technical approach and past performance include small business participation and delivery schedule. In addition, our analysis found that technical approach While data on DOD's use of source selection processes were not readily available, our analysis found that DOD increased its use of LPTA from fiscal year 2009 to fiscal year 2013 for contracts with obligations of $25 million or more (see table 2). We cannot make a comparison between fiscal year 2009 and fiscal year 2013 for the lower dollar range, because our prior report only focused on contracts with obligations of $25 million or more in fiscal year 2009. Several contracting and program officials said that their commands gave more attention to whether LPTA is an alternative option in light of declining budgets and Better Buying Power Initiatives. Further, declining budgets encouraged contracting and program officials to streamline requirements. For example: The Executive Director of Army Contracting Command--Aberdeen Proving Ground, one of five Army Contracting Command centers-- said that overall there is an increased cost consciousness regarding acquisitions, resulting from the Better Buying Initiatives and declining budgets. As a part of that increased cost consciousness, there is an increased willingness and necessity to re-examine tools that could present better prices. For example, the Executive Director referred to LPTA as "a tool that has been at the bottom of the source selection tool box collecting dust for some time." As it became necessary to take a look at what is really needed, they have "dusted off" the LPTA tool and had more discussions about how to set the technical acceptability at an appropriate level where there is no additional benefit from paying for more than that level. Contracting officials from Naval Facilities and Engineering Command stated that in the current fiscal environment of "doing more with less," they are educating their contracting personnel to use LPTA when appropriate. For example, on March 28, 2013, the Command sent an email communication to its contracting staff that provided guidance on the use of LPTA for task orders on multiple award contracts that are less than $10 million. The guidance stated that the contracting officer may choose to consider only price or cost for award purposes when the requirement is valued at less than $10 million, considered to be non-complex, and where non-cost factors are deemed unnecessary. These officials stated LPTA is less complex and less time consuming than tradeoff, and as a result, they can save personnel resources. In addition to internal guidance, Navy officials told us that the Better Buying Power Initiative also directs acquisition personnel to look for efficiencies and streamlining in acquisitions. Contracting officials from Naval Supply Systems Command stated they increased their scrutiny on tradeoff acquisitions, which has contributed to a cultural shift to increase the consideration of LPTA as an alternative source selection process. The command issued an October 9, 2012 memorandum to contracting activities that states if non-cost factors are more important than price, the acquisition must be reviewed by a senior level acquisition executive. Similarly, Air Force Materiel Command contracting and program officials stated that given the budget environment, it is increasingly difficult to justify higher dollar solutions from a technical standpoint when solutions may exist that meet the minimum requirement. DLA contracting officials stated that in light of resource constraints, it is increasingly common to purchase products that meet the program's needs without overstating the requirement. These officials told us LPTA is a good choice for mature, commercial requirements where there is no added value in conducting a tradeoff given the need to stretch budgets. Our review of contract documents and interviews with program and contracting officials from our 16 case studies found that for these specific acquisitions, DOD's ability to clearly define its requirements and its knowledge of potential vendors were the key factors that underpinned the decisions about whether to use tradeoff or LPTA. For example, in the eight case studies in which DOD used LPTA, DOD contracting and program officials generally stated they had sufficient knowledge of the requirements or vendors to feel confident that the lowest priced vendor, after meeting technical acceptability requirements, could deliver the product or service. In contrast, in our eight tradeoff case studies, contracting and program officials were less certain about requirements, were looking for innovative solutions, or wanted to use non-cost factors, such as past performance, as a differentiator when selecting the vendor. We found that for these 16 case studies DOD's reasons for choosing LPTA or tradeoff were generally consistent with guidance in the FAR and DOD's source selection procedures. Table 3 provides several highlights from the case studies that illustrate where DOD's ability to clearly define its requirements and its knowledge of potential vendors affected the source selection decision making process. Policy officials from some military departments noted that setting technical acceptability levels is important for contracts awarded through LPTA to be successful. Defense Procurement and Acquisition Policy officials told us the ongoing efforts to revise DOD's 2011 source selection procedures is intended, in part, to further define how to conduct best value processes. According to these officials, the revised guidance will emphasize that for LPTA, the solicitation must clearly describe the minimum evaluation standards. In addition, they expect the guide will provide additional information on how to determine when to pay a price premium. DOD, through courses offered by DAU and the military departments, provides both classroom and online training related to source selection processes to its acquisition personnel. Both DAU and military department officials stressed, however, the importance of on-the-job training in preparing personnel to make informed source selection determinations. Congress passed the Defense Acquisition Workforce Improvement Act (DAWIA) in 1990 to both ensure effective and uniform education, training, and career development of members of the acquisition workforce, including contracting and other career fields, and established DAU to provide training. The act also required DOD to establish career paths, referred to by DOD as certification requirements, for the acquisition workforce. DOD military departments must track acquisition workforce personnel to ensure that they meet mandatory standards established for level I (basic or entry), level II (intermediate or journeyman), or level III (advanced or senior) in a career field, such as contracting, life cycle logistics, and program management. Similar requirements and levels are established for each of the acquisition career fields identified by DOD. DOD identified a need to increase the capacity and size of the acquisition workforce over the past several years. For example, in a DOD assessment of the contracting workforce completed in September 2008, senior DOD contracting leaders identified the importance of not only mastering the "what," but in using critical thinking and sound judgment to apply the knowledge--thus mastering the "how" of contracting among its entry-level and mid-career personnel. To help address concerns that DOD had become too reliant on contractors to support core functions and to rebuild the capacity and skill sets that eroded in the years that followed the downsizing of the workforce in the 1990s, DOD increased its number of acquisition workforce positions from 133,103 in fiscal year 2009 to 151,355 in fiscal year 2013--including a 9.5 percent increase or an additional 2,616 positions--in the contracting career field. DAU officials identified five training courses that are taken either online or in the classroom to provide acquisition personnel, including contracting and program officials, the knowledge and skills necessary to make source selection decisions. Contracting personnel are required or recommended to complete all five of the identified training courses at some point in their career to obtain specific DAWIA certifications. Additionally, DAU makes these classes available to personnel outside the DAWIA acquisition workforce. Based on our analysis of student self-reported exit data in fiscal year 2013 and our discussion with DAU officials, we found that many graduates for these courses did not indicate their career field when completing the course registration or exit survey, particularly for online courses, which makes it difficult to know how many personnel outside of the DAWIA workforce with acquisition-related responsibilities took these courses. In September 2011, we reported on personnel working on service acquisitions who are outside the DAWIA acquisition workforce with acquisition-related responsibilities and found the number of these individuals to be substantial. As such, we recommended that the Secretary of Defense establish criteria and a time frame for identifying personnel outside the DAWIA acquisition workforce with acquisition-related responsibilities. DOD concurred with the recommendation and, as of June 2014, is developing a way to identify all of the non-DAWIA personnel with acquisition-related responsibilities and the appropriate training curriculum they should receive. Table 4 outlines each of these five courses. We also found that military departments provided source selection training--offering both overview and refresher courses--to contracting staff and others involved in the source selection process. Table 5 identifies examples of the training courses offered by various military departments. DAU and military department officials we spoke with pointed to their training as providing educational resources from which the acquisition workforce can understand the basics of appropriate source selection processes. These officials also stressed the role on-the-job training plays when making such determinations. For example, policy officials within the office of the Assistant Secretary of the Army for Acquisition, Technology, and Logistics told us that on-the-job training provides important exposure for less experienced acquisition staff to the source selection decision making processes. As a result, contracting officials have a better understanding of situations where a particular source selection process may be more appropriate than others. Many officials told us that contracting officials can best understand the acquisition process and apply their in-classroom training through making real world source selection decisions. As such, several military department officials, including contracting officials from our case studies, provided examples of why they consider on-the-job training to be important, including the following: Air Force Installation Contracting Agency contracting officials from one of our case studies and a command official told us that on-the-job training and experience are important factors that affect the source selection process determination. They stated that on-the-job training provides experience and opportunities for contracting officers to make critical decisions that can only occur in a source selection environment. To that end, these officials told us that informal mentoring relationships are established wherein newer, less experienced staff is assigned to work with more senior staff. Naval Facilities Engineering Command officials and contracting officials from one of our case studies stated that the task of identifying when requirements would better suit a particular source selection process is learned through gaining experience from on-the-job training. Naval Sea Systems Command officials from one of our case studies stated that the best training they received is on-the-job training. These officials explained that more senior contracting officers help newer contracting staff with their acquisitions. They consider mentor type training invaluable in learning how to conduct an acquisition. Best value processes continued to underlie the vast majority of DOD's new, competitively awarded contracts. DOD has increased its use of the LPTA process in recent years for higher value contracts, and its decision making regarding which source selection process to use did not appear to be ill-advised. Its decision making was generally rooted in knowledge about the requirements and vendors. In our sample of 16 cases, we identified instances in which DOD used LPTA for what appeared to be complex acquisitions, such as the system to mimic an anti-aircraft missile, but the acquisition team had considerable knowledge about the requirements or vendors. In other cases, DOD used the tradeoff process for what appeared to be relatively simple acquisitions, such as fabric dyeing, yet the acquisition team identified complexities about the proposed acquisition. Amid the climate of rapidly building fiscal pressures and cost consciousness, selecting the right source selection approach continues to be essential to ensure the department acquires what it needs without paying more than necessary. We are not making recommendations in this report. We provided a draft of this report to DOD for comment. DOD did not provide written comments on this report but did provide technical comments, which we incorporated as appropriate. We are sending copies of this report to appropriate congressional committees and the Secretary of Defense. 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) 512-4841 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 major contributions to this report are listed in appendix III. Committee reports from the Senate and House Armed Services committees and the Joint Explanatory Statement accompanying the National Defense Authorization Act for Fiscal Year 2014 mandated GAO to report on the Department of Defense's (DOD) use of best value processes. We determined 1) the extent to which DOD used best value processes in fiscal year 2013; (2) the factors DOD considers when choosing a source selection process; and (3) training DOD provides to its acquisition personnel on source selection processes. In addition, in response to a matter identified in a 2013 report from the House Armed Services Committee, appendix II includes information on the military departments' acquisitions of body armor vests in fiscal year 2013. To determine the extent DOD used the best value processes in fiscal year 2013, we used data from the Federal Procurement Data System-Next Generation (FPDS-NG) as of October 2013 to identify a population of contracts based on the following criteria: (1) newly awarded by DOD in fiscal year 2013, (2) competitively awarded, and (3) had obligations of over $1 million in fiscal year 2013. This analysis identified a population of 2,851 contracts, and from this population we selected a stratified random sample of 227 contracts, with the strata defined by whether the contract had obligations of $25 million or more, or whether its obligations totaled over $1 million and less than $25 million. We divided the data into two groups including contracts with higher obligations of $25 million or more and contracts with lower obligations over $1 million and less than $25 million. We used the $25 million threshold to divide our data set based on a Defense Federal Acquisition Regulation Supplement (DFARS) requirement that contracts for products or services with $25 million or more in estimated total costs for any fiscal year have written acquisition plans, which contain information on the anticipated source selection process. more, we compared the percentage of contracts solicited using best value processes to fiscal year 2009 data we reported in October 2010.prior report did not include contracts with lower obligations of less than $25 million. DFARS SS 207.103(d)(i)(B). We obtained and analyzed the solicitation documents for all of the contracts in our sample to identify the source selection process DOD used. We verified the contract award fields in FPDS-NG with contract and solicitation data to ensure that the contracts within our sample were in-scope. Based on that analysis, we determined that a total of 44 contracts were out of scope for our review. These 44 contracts were excluded from our analysis, because they were either incorrectly coded in our key parameters, or were awarded using processes outside of the Federal Acquisition Regulation (FAR) Part 14 on sealed bidding or Part 15 on contracting by negotiation (which includes best value processes) and consequently should not have been in our sample, resulting in a total of 183 contracts in our review (see table 6). After accounting for these errors, we assessed the reliability of FPDS-NG data by electronically testing the data to identify problems with consistency, completeness, or accuracy and reviewed relevant documentation. We determined that the FPDS-NG data were sufficiently reliable for the purposes of our review. 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 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 (e.g., plus or minus 8 percentage points). This is the interval that would contain the actual population value for 95 percent of the samples we could have drawn. Unless otherwise noted, percentage estimates of contracts with obligations of $25 million or more have 95 percent confidence intervals within +/- 8 percentage points of the estimate itself. Similarly, for contracts with obligations over $1 million and less than $25 million, percentage estimates have confidence intervals within +/- 10 percentage points of the estimate itself. In addition, to compare characteristics of contracts in our sample that used best value processes for both strata, we determined contract type, the type of procurement (product versus service), and if commercial item procedures were used for our sample using FPDS-NG data and conducted data reliability analysis on these fields, by verifying this information with the contract and solicitation documents. For the contracts identified as tradeoff, we analyzed the contract and solicitation documentation to identify the most frequently used non-cost evaluation factors and their relative importance to price. To identify what factors DOD considers when choosing a source selection process, we analyzed the FAR, DFARS, and DOD and military departments' regulation, policy, and guidance on source selection. We interviewed senior DOD policy officials at Defense Procurement and Acquisition Policy, and at the Army, Navy, and Air Force headquarters. We also interviewed officials from at least two buying commands--based upon such factors as the number of contract actions and obligation amounts--at each military department (Army, Navy, and Air Force), as well as the Defense Logistics Agency (DLA) to discuss factors affecting their decision process on which source selection process to use. In addition, we analyzed our sample of 183 contracts and selected 16 new, competitively awarded contracts with obligations ranging from $1.1 million to $150.7 million to further our understanding of why acquisition officials chose the source selection process. Our 16 case studies--8 tradeoff and 8 LPTA--included at least 1 from each military department and DLA, different product and service types, and amount of dollars obligated in fiscal year 2013. For the case studies, we interviewed DOD contracting and program officials and reviewed contract documentation, including the acquisition plan, solicitation, and source selection decision memorandum to further understand the source selection decision making process. The results from our review of these selected contracts cannot be generalized beyond the specific contracts selected. During the course of our review, we also interviewed officials from the following commands: Department of the Army, Army Contracting Command, Aberdeen Proving Ground, Maryland; Medical Command, Fort Detrick, Maryland; and Intelligence and Security Command, Fort Belvoir, Virginia Department of the Army, United States Army Corps of Engineers, Washington, D.C., and Huntsville Center, Alabama Department of the Navy, Naval Air Systems Command, Patuxent River, Maryland; Naval Facilities Command, Navy Yard, Washington, D.C.; and Naval Supply Systems Command, Mechanicsburg, Pennsylvania Department of the Navy, United States Marine Corps Installations and Logistics Command, Navy Annex, Virginia; and Marine Corps Systems Command, Quantico, Virginia Department of the Air Force, Installation Contracting Agency and Air Force Materiel Command, both located at Wright-Patterson Air Force Base, Ohio Defense Logistics Agency-Energy, Ft. Belvoir, Virginia; and Defense Logistics Agency-Troop Support, Philadelphia, Pennsylvania Joint Theater Support Contracting Command, Kabul, Afghanistan. To determine what training DOD provides to its acquisition personnel on source selection processes, we met with Defense Acquisition University (DAU) officials and instructors and reviewed training materials. We also obtained attendance and workforce data from the DOD Office of the Under Secretary of Defense (Acquisition, Technology, and Logistics), Human Capital Initiatives. Further, we collected and reviewed military department and command specific training documents to identify if additional source selection training is given in addition to DAU provided training. We also interviewed DOD policy officials at Defense Procurement and Acquisition Policy, several commands at the military departments, as well as contracting and program personnel at the contracting offices of the selected military departments from the 16 case studies on training provided related to source selection processes. We supplemented these case studies with interviews with industry associations to identify their perspectives about DOD's source selection processes. We conducted this performance audit from September 2013 through July 2014 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 Marine Corps, Defense Logistics Agency (DLA), and Army bought similar soft body armor vests made of ballistic material in fiscal year 2013 using different source selection processes. Knowledge of requirements or vendors were key considerations in each acquisition, but distinct needs led to different decisions about which source selection process to use even when acquiring the similar product. The Marine Corps issued one delivery order to purchase soft body armor vests for $2.3 million in fiscal year 2013 using the lowest price technically acceptable (LPTA) process. It issued this order from a multiple award, indefinite delivery indefinite quantity (IDIQ) contract awarded to two vendors in fiscal year 2009 using the LPTA process. The contracting officer told us they chose to use LPTA for the base contract because they consider soft body armor vests to be a commodity product with clearly defined technical performance specifications. Further, the contracting officer, in consultation with the program office, saw no opportunity for tradeoff above industry standard because the industry standard met their current needs. Ongoing research and development showed that any tradeoff for enhanced performance would lead to the armor being heavier, an unacceptable outcome. For the base contracts, the Marine Corps awarded to the second and third lowest priced vendors, because the lowest priced vendor was deemed non-responsible. DLA issued 23 delivery orders to purchase soft body armor vests for $288.1 million in fiscal year 2013. It issued these orders from three separate IDIQ contracts awarded to three vendors in fiscal years 2011 and 2012 using the tradeoff process. DLA contracting officials told us that they chose to use the tradeoff process for these contracts because they wanted to use past performance as a key discriminator, which is generally not allowed using the LPTA process. Further, because DLA buys for sustainment purposes and its quantity needs fluctuate, officials told us that past performance was a critical determination factor requiring the use of the tradeoff process, in addition to the vendor's historic production capacity, delivery schedule, and other performance capabilities. The Army issued one delivery order to purchase soft body armor vests for $10,201 in fiscal year 2013 using the LPTA process. It issued this order from one of the multiple award, IDIQ contracts awarded to eight vendors in fiscal years 2009 and 2010 using the tradeoff process. Army contracting officials told us they chose to use the tradeoff process for the base contract, because it provided the Army more discretion in evaluating past performance as well as leaving open the possibility that industry vendors might offer a more innovative solution. Once the Army had a group of qualified vendors on contract, they could then use the LPTA process for subsequent buys. In addition to the contact name above, the following staff members made key contributions to this report: Molly Traci, Assistant Director; James Kim; Anh Nguyen; Erin Stockdale; Jina Yu; Claire Li; Jessica Drucker; Danielle Greene; Roxanna Sun; John Krump; Mark Ramage; Julia Kennon; Virginia Chanley; and Carol Petersen.

DOD obligated about $310 billion in fiscal year 2013 for products and services needed to support its mission. To competitively acquire what is needed, DOD may use best value processes--including tradeoff and LPTA--to evaluate vendors' proposals. When using the tradeoff process, DOD weighs the relative importance of price against non-cost factors. By contrast, DOD may use the LPTA process and award the contract based on lowest price once technical requirements are met. Congress mandated GAO to review DOD's use of best value processes. GAO identified, among other things, (1) the extent to which DOD used best value processes in fiscal year 2013, (2) the factors DOD considers when choosing a source selection process, and (3) training DOD provides to its acquisition personnel on source selection processes. GAO identified and reviewed solicitations for a projectable sample of 183 contracts out of 2,851 new, competitively awarded contracts that DOD awarded in fiscal year 2013 with obligations over $1 million. GAO also reviewed DOD and military departments' guidance regarding their use of the best value process. GAO selected 16 contracts for case studies based on military department, best value process used, and other factors. GAO reviewed contract documents and interviewed program and contracting officials for these case studies. GAO also reviewed DAU and military departments' training on source selection procedures. DOD provided technical comments that GAO incorporated as appropriate. The Department of Defense (DOD) used two best value processes--tradeoff and lowest price technically acceptable (LPTA)--for approximately 93 percent of the 2,851 new, competitively awarded contracts awarded in fiscal year 2013 with obligations greater than $1 million. DOD used the tradeoff process most often in GAO's sample of contracts to acquire services, regardless of obligation value. For contracts with higher obligations, DOD used the LPTA process primarily to acquire commercial products, such as fuel. In contrast, for contracts in GAO's sample with lower obligations, DOD used the LPTA process to acquire both products and services. Several contracting and program officials said that their commands gave more attention to whether LPTA is an alternative option in light of declining budgets and efficiency initiatives. For contracts with obligations of $25 million or more, GAO found that DOD increased its use of LPTA since GAO last reported on this issue in October 2010 using fiscal year 2009 data. GAO's prior report did not include contracts with lower obligations. Source: GAO analysis of DOD contract and solicitation documents. | GAO-14-584 a The 95 percent confidence intervals for estimates in this table are within +/- 8 percentage points of the estimates themselves. DOD's ability to clearly define its requirements and its knowledge of potential vendors were key factors that underpinned decisions about whether to use tradeoff or LPTA in GAO's 16 case studies. In the eight case studies in which DOD used LPTA, contracting and program officials generally stated that they had sufficient knowledge of the requirements or vendors to feel confident that the lowest priced vendor, meeting DOD's technical requirements, could deliver the product or service. In contrast, in the eight tradeoff case studies, contracting and program officials were less certain about requirements, were looking for innovative solutions, or wanted to use non-cost factors to differentiate vendors. For example, the United States Army Corps of Engineers used technical non-cost factors to evaluate vendors' abilities to use robotics for explosives disposal. These factors are generally consistent with guidance in the Federal Acquisition Regulation and DOD's March 2011 source selection procedures. DOD, through courses offered by the Defense Acquisition University (DAU) and the military departments, provides both classroom and online training related to source selection processes to its acquisition personnel. Both DAU and military department officials stressed, however, the importance of on-the-job training in preparing personnel to make informed source selection determinations. For example, Naval Facilities Engineering Command officials told GAO that determining when requirements are better suited for tradeoff or LPTA is learned through gaining experience from on-the-job training.

TANF, created as part of the 1996 welfare reforms, gives states the authority to make key decisions about how to allocate federal and state funds to assist low-income families. States generally determine cash assistance benefit levels and eligibility requirements for low-income families seeking support under state welfare programs. When states set their TANF cash assistance benefit levels, the amount a family receives depends, in part, on who is in the assistance unit. An assistance unit is a group of people living together, often related by blood or some other legal relationship. States can exclude adults from the assistance unit but still allow the children to receive some assistance. In these child-only cases, the adults in the family are excluded from the assistance unit and are generally not considered when calculating the benefit amount. States are also generally allowed to spend TANF funds on other services as long as these services support TANF purposes, which are: (1) to provide assistance to needy families so that children may be cared for in their own homes or homes of relatives; (2) to end dependence of needy parents on government benefits by promoting job preparation, work, and marriage; (3) to prevent and reduce out-of-wedlock pregnancies; and (4) to encourage two-parent families. Federal law governing TANF generally refers to the term "assistance" and does not make distinctions between different forms of aid funded by TANF. However, HHS draws distinctions between "assistance" and "nonassistance." HHS regulations define assistance to include cash, payments, vouchers, or other forms of benefits designed to meet families' ongoing, basic needs. 45 C.F.R. SS 260.31. HHS also generally includes in assistance services, such as child care and transportation assistance for parents who are unemployed. HHS uses the term nonassistance to refer to TANF expenditures that fulfill one of the four TANF purposes, but do not meet this regulatory definition. In our report, we refer to HHS's definition of assistance as "cash assistance" and its reference to nonassistance as "non-cash services." focused on participants gaining employment and work-related skills. States that do not meet minimum work participation rates may be penalized by a reduction in their block grant. Several factors may help states meet their work participation rates, such as reductions in their cash assistance caseloads and spending state funds for TANF purposes above the required MOE amount. In addition, states are limited in the amount of time they can provide federal cash assistance to families. In general, states may not use federal TANF funds to provide cash assistance to a family that includes an adult who has received cash assistance for 5 years or more.other TANF-funded services. Such time limits do not apply to child-only cases or to Federal law sets forth the basic TANF reporting requirements for states. For example, states are required to provide information and report to HHS on their use of TANF funds in TANF state plans outlining how each state intends to run its TANF program (generally filed every 2 years), quarterly reports on demographic and economic circumstances and work activities of families receiving cash assistance, quarterly financial reports providing data on federal TANF and state MOE expenditures, and annual reports on state programs funded with MOE funds, among other things. HHS reviews state information and reports to ensure that states meet the conditions outlined in federal law. For example, HHS uses the reported information to determine whether states are meeting work participation rates. In creating the TANF block grant, Congress emphasized the importance of state flexibility, and restricted HHS's regulatory authority over the states except to the extent expressly provided in the law. For example, HHS generally has limited authority to impose new TANF reporting requirements on states unless directed by Congress, so many changes to the types of information that states are required to report would require congressional action. As a fixed federal funding stream, the federal TANF block grant amount does not automatically adjust as caseloads or needs change, and the level of the federal grant has not been adjusted for inflation since the program's creation in 1996. States may reserve federal TANF funds under a "rainy day fund" for use in future years, providing states additional flexibility in their budget decisions. In fact, we reported in 2010 that many states had some TANF reserves that they drew down to meet increasing needs in the recent economic downturn. The federal law that established TANF also created a TANF Contingency Fund that states could access in times of economic distress. Similarly, during the recent economic recession, the federal government created a $5 billion Emergency Contingency Fund for state TANF programs through the American Recovery and Reinvestment Act of 2009, available in fiscal years 2009 and 2010. In addition, TANF supplemental funds had been awarded to 17 states with historically low welfare spending per person and high population growth each year, although these grants expired in June 2011. A key TANF purpose stated in law is to provide assistance to needy families so that children may be cared for in their own homes or homes of relatives. With the TANF block grant in effect replacing AFDC--a key federal cash welfare program for needy families--in fiscal year 1997, much attention has focused since then on the decline in the number of families receiving TANF cash assistance and the implications for poor children and families. The law does not explicitly state that poverty reduction is a TANF purpose, and there are generally no federal requirements or benchmarks as to eligibility criteria or benefit amounts, or on the percentage of low-income families who are to be covered by a state's TANF program. When states implemented TANF during fiscal year 1997, a monthly average of 3.9 million families were receiving cash assistance. This number declined by over half within the first 5 years of TANF. Since that time, the average number of families receiving cash assistance each month has remained well below the initial number of 3.9 million families, and averaged about 1.9 million families in 2011. Our previous work shows that although TANF caseloads have declined, many families with incomes still low enough to receive aid did not do so for a variety of reasons. In a 2010 report, we assessed changes in the number of families eligible for and receiving cash assistance under AFDC and TANF from 1995 to 2005, the most recent data available at that time. The strong economy of the 1990s, TANF's focus on work, and other factors such as additional funding for child care and expansions in the Earned Income Tax Credit contributed to increases in the share of single mothers working and fewer families receiving TANF cash assistance. While some families worked more, had higher incomes, and were not eligible for cash assistance, others had income that left them still eligible; however, many of these eligible families were not participating in the program. According to our estimates, the majority--87 percent--of that caseload decline can be explained by the decline in eligible families participating in the program, in part because of changes to state welfare programs. These changes include mandatory work requirements; changes to application procedures; lower benefits; policies such as lifetime limits on assistance; diversion strategies such as providing one- time, non-recurring benefits instead of monthly cash assistance to families facing temporary hardships; and sanctions for non-compliance, according to a review of the research. Among eligible families who did not receive cash assistance, 11 percent did not work, did not receive means- tested disability benefits, and had very low incomes (see fig. 1). We have not updated this analysis; however, some recent research shows that this potentially vulnerable group may be growing. We have also reported in 2012 that during and after the recent significant recession, caseloads increased in most states, and the overall national increase totaled about 15 percent from fiscal years 2008 to 2011. This has been the first test of TANF--with its capped block grant structure-- during severe economic times. We noted that almost 40 percent of households with children and income below 200 percent of the federal poverty threshold that had exhausted Unemployment Insurance benefits received aid through the Supplemental Nutrition Assistance Program (SNAP)(formerly known as food stamps); however, less than 10 percent received TANF cash assistance in 2009. The relatively modest increase in TANF caseloads--and decreases in some states--has raised questions about the responsiveness of TANF to changing economic conditions. After initial declines in the poverty rate among children-- from 21 percent in 1995 (prior to TANF's implementation) to 16 percent in 2000--the rate had risen to 22 percent in 2011, according to the Bureau of the Census. In our recent work, we identified several actions that states have taken to address increased needs while also experiencing budgetary distress. These include drawing down TANF reserves and accessing TANF Contingency Funds. In addition, nearly all states received a combined total of $4.3 billion of the $5 billion TANF Emergency Contingency Fund, created by Congress under the American Recovery and Reinvestment Act of 2009, in fiscal years 2009 through 2011. States used these funds in part to create or expand subsidized employment programs. Setting eligibility criteria and benefit levels are ways that states may manage the costs of their TANF cash assistance programs, directly affecting the number of families served and the amount of assistance they receive. 2012 report cited tension between the need to provide cash assistance and the need to provide other state services during the recent economic downturn. Eligibility criteria and benefit amounts for cash assistance can vary greatly by state. For example, in Arkansas, as of July 2011, for a family of three, earnings had to be equal to or below $279 per month in order to be eligible for cash assistance, and their maximum benefit amount was $204. In contrast, in California, as of July 2011, a family of three's income had to be equal to or below $1,224 per month to be eligible for cash assistance, and their maximum benefit amount was $714. See Urban Institute, Welfare Rules Databook: State TANF Policies as of July 2011 (Washington, D.C.: Aug. 2012). stringent eligibility criteria and reduced benefit amounts for cash assistance to help manage costs. We estimated in a 2010 report that had certain 2005 TANF eligibility-related rules been in place in 1995, 1.6 percent fewer families overall would have been eligible for cash assistance in 1995. We also noted in that report that the value of TANF cash benefits had fallen over time; average cash benefits under 2005 TANF rules were 17 percent lower than they were under 1995 AFDC rules. States are required to report on some features of their cash assistance programs, but there is no requirement for them to report on eligibility criteria, benefit amounts, or coverage rates. In 2012, HHS officials noted that they do not have the authority to require states to provide basic information about the cash assistance programs, including state TANF eligibility criteria, benefits levels, and other program features. HHS provides support to the Urban Institute to create and maintain the Welfare Rules Database on characteristics of state TANF programs, including features such as eligibility criteria and benefit levels. Regarding information on TANF coverage of low-income families, in our 2005 report on several means-tested programs including TANF, we noted that having participation or coverage rate information is an important tool for program managers and policymakers, even among programs that were not intended to serve everyone eligible for program benefits. However, HHS generally does not include these rates in TANF annual performance plans or the agency's TANF Annual Report to Congress. Much of the federal welfare policy discussion has focused on how to help low-income parents caring for their children become employed and less dependent on government assistance. Yet in 2010, over 40 percent of families receiving TANF cash assistance were "child-only," meaning the adults in the household were not included in the benefit calculation, and aid was provided only for the children. There are four main categories of child-only cases in which the caregiver (a parent or non-parent) does not receive TANF benefits: (1) the parent is receiving Supplemental Security (2) the parent is a noncitizen or a recent legal immigrant; (3) Income; the child is living with a non-parent caregiver, often a relative; and (4) the parent has been sanctioned and removed from the assistance unit for failing to comply with program requirements, and the family's benefit has been correspondingly reduced. Families receiving child-only assistance are generally not subject to federal work requirements and time limits. HHS collects descriptive information from states on the number and selected characteristics of child-only cases; however, information on state policies and plans for specifically assisting these families is not required and not available at the national level. As the number of TANF cases with an adult in the assistance unit has declined significantly, child-only cases have become more prominent. We reported in 2012 that the percentage of child-only cases increased from about 23 percent from July through September 1997 to over 40 percent in fiscal year 2010. Our work and other research have pointed out the need for more attention to child-only cases. Our 2011 report focused on non-parent caregivers in TANF child-only cases, often relatives, who have stepped in to help raise children for a variety of reasons, in some cases due to child abuse or neglect by a parent. available to children living with non-parents depends on the extent to which a child welfare agency becomes involved in the family's situation, among other things. However, we reported that information sharing between TANF and child welfare services to better serve children living with relative caregivers was a challenge. Another study, prepared under a grant from HHS and issued in December 2012, noted that child-only cases have not been a focus of TANF policies, yet the program can serve as an important source of support for vulnerable children in these situations, although this support is not uniform among the states. It also noted the significant differences among the various types of child-only cases, concluding that future attention needs to take into account the varying policy contexts--child welfare, disability, and immigration policies--involved. GAO, TANF and Child Welfare Programs: Increased Data Sharing Could Improve Access to Benefits and Services, GAO-12-2 (Washington, D.C.: Oct. 7, 2011). Congress and program managers. Such information may also help clarify states' TANF policies for providing income support for low-income families and children (see table 1). One of the four TANF purposes is to end dependence of needy parents on government benefits by promoting job preparation, work, and marriage; TANF's work participation rate requirement is in keeping with the purpose of helping parents prepare for and find jobs. PRWORA established higher work participation rate requirements and eliminated many exemptions from these requirements for recipients compared to what was in place prior to TANF.mandatory work requirements could reduce welfare receipt and increase This reflected research that found that employment among single mothers and help address concerns about long-term welfare receipt. Pub. L. No. 109-171, 120 Stat. 4 (2006). GAO-10-525 and GAO, Temporary Assistance for Needy Families: Update on Families Served and Work Participation, GAO-11-880T (Washington, D.C.: Sept. 8, 2011). numbers of families receiving TANF cash assistance over a specified time period are accounted for in each state's caseload reduction credit, which essentially then lowers the states' required work participation rate from 50 percent.For example, if a state's caseload decreases by 20 percent during the relevant time period, the state receives a caseload reduction credit equal to 20 percentage points, which results in the state work participation rate requirement being adjusted from 50 to 30 percent. Because of the dramatic declines in the number of families receiving cash assistance after TANF implementation, caseload reduction credits effectively eliminated work participation rate requirements in some states. For example, we reported that in fiscal year 2006, 18 states had caseload reductions that were at least 50 percent, which reduced their required work participation rates to 0. We noted that state caseload declines have generally been smaller after DRA changed the base year for measuring caseload reductions from fiscal year 1995 to fiscal year 2005, among other things.However, many states are still able to use caseload declines to help them lower their required work participation rates. For example, for the most recent data available in fiscal year 2009, 38 of the 45 states that met their required work participation rates for all TANF families did so in part because of their caseload declines (see fig. 2). Additionally, we reported that while states' caseload reduction credits before DRA were based primarily on their caseload declines, after DRA, states' spending of their own funds on TANF-related services also became a factor in some states' credits. Specifically, states are required to spend a certain amount of funds every year--their MOE funds--in order to receive all of their federal TANF block grant. However, if states spend in excess of the required amount ("excess MOE"), they are allowed to functionally increase their caseload reduction credits.that, in fiscal year 2009, 32 of the 45 states that met their required work participation rates for all families receiving cash assistance claimed excess MOE toward their caseload reduction credits. In addition, 17 states would not have met their rates without claiming these expenditures (see fig. 2). In 2010, we concluded that because of the various factors that affect the calculation of states' work participation rates, the rate's usefulness as a national performance measure for TANF is limited, and changes intended to improve data quality may be creating new challenges for states. In addition to the caseload reduction credits and excess MOE discussed above, we reported that some states have made changes to their TANF programs that may affect which families are counted in their work participation rates, such as providing some families assistance in non- TANF programs, discussed in the next section. Given these various factors, we have noted that the work participation rate does not allow for clear comparisons across state TANF programs or comparisons of individual state programs over time. This is the same conclusion we reached in our 2005 report that recommended changes to improve this measure of states' performance. In that report, we found differences across states that contributed to an inconsistent measurement of work participation. For example, we found that some states reported the hours recipients were scheduled to work, rather than those actually worked, as work participation. DRA contained changes generally expected to increase internal controls and improve data quality, however it also created new challenges for states. In our 2010 review of work participation rates, many states cited challenges in meeting work performance standards under DRA, such as new requirements to verify participants' actual activity hours and certain limitations on the types and timing of activities that count toward meeting the requirements. Local TANF officials noted that verification of TANF families' work participation requires significant time and collaboration between TANF staff and employers and other staff at work activity sites. Because of this, some noted that they have had to designate or hire specific staff to manage the tracking and verification of families' work participation, and yet these activities also remain a routine part of all local TANF staff's responsibilities. We concluded at the time that the TANF work participation rate requirements may not yet have achieved the appropriate balance between flexibility for states and accountability for federal TANF goals. Work participation rate requirements can play an important role in encouraging states to move TANF recipients into work; however, our work indicates some ways that current policies may be discouraging states from engaging some TANF recipients with complex needs and from providing an appropriate mix of activities. According to the preamble to a TANF final rule from 1999, several provisions of the law, including time limits, higher participation rate requirements, and fewer individual exemptions from participation requirements, taken together, signal that states must broaden participation beyond the "job ready." However, some state TANF officials we interviewed for a 2012 report said the pressure to meet TANF work participation rate requirements causes them to focus on the "ready to work" cash assistance population, which can leave the "harder-to-serve" population without services. States may generally only count a family's participation in job readiness assistance, which can include mental health and substance abuse treatment, towards the work participation rate for six weeks in a year. A 2012 MDRC study conducted for HHS suggested that combining work-focused strategies with treatment or services may be more promising than using either strategy alone, especially for people with disabilities and behavioral health problems. Additionally, we have reported that some states find the restrictions on the amount of time they are allowed to count vocational educational training towards the work participation rate to be a challenge. State TANF administrators have expressed concerns that the 12-month lifetime limit on vocational educational training may be insufficient for TANF participants to progress to higher-wage employment that will prevent them from needing assistance in the future. Officials we interviewed more recently also noted that the restrictions may not match the needs of workers who lost jobs during the recession, who may require more education or retraining to find a new job. Finally, we have reported that many states choose to provide cash assistance to two-parent families outside of TANF. State officials have told us that two-parent families often have as many or more challenges as single parents, and states' work participation rate requirement for two-parent families is 90 percent minus any caseload reduction credit the state receives. In 2010, we reported that 28 states provide cash assistance to two-parent families through separate programs funded solely with state dollars, and that families for whom states use these programs to provide cash assistance are those that typically have the most difficulty meeting the TANF work requirements. In view of our prior work that has identified limitations in the work participation rate's usefulness, potential options are available that may motivate states to engage more families in work activities and provide a more accurate picture of state performance (see table 2). Additional information may be needed before adopting any of these potential options. The work participation rate is complex and has affected significant state policy decisions. Any adjustment to or replacement of the measure would likely have a profound impact on state TANF programs. For example, introducing an employment credit would constitute a significant change in the way states may meet work participation requirements, but the effects this approach would have on participation rates and state TANF programs are unknown. Additionally, it is difficult to anticipate ways that the potential options may interact with one another. We have reported that allowing states to test approaches can foster innovation and help identify possible unintended consequences. Members of Congress have raised concerns about a 2012 announcement by HHS that the agency would use waiver authority to allow states to test various strategies, policies, and procedures designed to improve employment outcomes for needy families.remains controversial and the House of Representatives passed a bill in The potential for waivers 2013 aimed at preventing HHS from implementing them. According to HHS, as of February 25, 2013, no state had formally submitted a request for a waiver related to TANF work requirements. Still, state experience with many of the potential options outlined above could provide valuable information to policymakers about the effects of changes if they choose to alter the work participation rate as it is currently implemented. If Congress wanted to make changes, it could set parameters for testing some approaches through pilots in selected states, for example, to gather additional information for considering changes to TANF that would maintain or improve its focus on work and self-sufficiency. We reported in 2012 that the TANF block grant has evolved into a flexible funding stream that states use to support a broad range of allowable services, but the accountability framework currently in place in federal law Declining cash and regulations has not kept pace with this evolution.assistance caseloads freed up federal TANF and state MOE funds for states, and over time, states shifted spending to other forms of aid, which we refer to as non-cash services. Non-cash services can include any other services meeting TANF purposes, such as job preparation activities, child care and transportation assistance for parents who are employed, out-of-wedlock pregnancy prevention activities, and child welfare services, as well as some cash benefits such as non-recurring short-term benefits and refundable tax credits to low-income working families. In fiscal year 1997, nationwide, states spent about 23 percent of federal TANF and state MOE funds on non-cash services. In contrast, states spent almost 64 percent of federal TANF and state MOE funds for these purposes in fiscal year 2011. However, there are no reporting requirements mandating performance information specifically on families receiving non-cash services or their outcomes. There is also little information related to TANF's role in filling needs in other areas like child welfare, even though this has become a more prominent spending area for TANF funds in many states. We reported that while states prepare state plans and expenditure reports that individually provide some information on non-cash services, even when considered together, these do not provide a complete picture on state goals and strategies for uses of TANF funds. For instance, we noted that state plans currently provide limited descriptions of a state's goals and strategies for its TANF block grant, including how non-cash services fit into these goals and strategies, and the amount of information in each plan can vary by state. We reported that HHS is taking some steps to improve expenditure reports from states. Still, we concluded that without more information that encompasses the full breadth of states' uses of TANF funds, Congress will not be able to fully assess how funds are being used, including who is receiving services or what is being achieved. We included a Matter for Congressional Consideration regarding ways to improve reporting and performance information, though Congress has not yet enacted such legislative changes. Increases in the expenditures states have claimed as MOE, including expenditures by third parties, may warrant additional attention. We reported in 2012 that MOE is now playing an expanded role in TANF programs. As shown in figure 3, according to HHS data, until fiscal year 2006, MOE levels remained relatively stable, hovering around the 80 percent required minimum or the reduced rate of 75 percent for states From fiscal years that met their work participation rate requirements.2006 through 2009, they increased each year. We reported that several reasons account for the increase during this period: Many states claimed additional MOE to help them meet the work participation rate requirements, as discussed above. During the recession states accessed TANF Contingency Funds, which required them to meet a higher MOE level, and Emergency Contingency Funds, which required them to have had increases in certain expenditures or in the number of families receiving cash assistance. An interim rule temporarily broadened the types of activities on which states could spend state funds and be countable for MOE purposes. We noted that this greater emphasis on the use of MOE increases the importance of understanding whether effective accountability measures are in place to ensure MOE funds are in keeping with requirements. These recent increases in state MOE have raised questions about how to ensure that state expenditures represent a sustained commitment to spending in line with TANF purposes. We noted in 2012 that if MOE claims do not actually reflect maintaining or increasing service levels, low- income families and children may not be getting the assistance they need and federal funds may not be used in the most efficient manner. However, the recent increases in state MOE spending which states have used to access contingency funds and meet work participation rate requirements may not represent new state spending. For example, officials in one state told us in 2012 that they began claiming MOE expenditures for an existing state early-childhood education program for needy families in fiscal year 2008. Officials in two other states said they hired consultants during the economic downturn to identify opportunities to claim MOE expenditures from existing state programs that were not originally used for TANF purposes. For example, one state found that many of its programs could be counted under TANF as "prevention of out- of-wedlock pregnancies" so it claimed funds spent on these programs as MOE. Additionally, we reported in 2012 that many states have recently begun to count third party nongovernmental expenditures to help meet TANF MOE spending requirements. In addition to its own spending, a state may count toward its MOE certain in-kind or cash expenditures by third parties--such as nongovernmental organizations--as long as the expenditures meet other MOE requirements, including those related to eligible families and allowable activities. We reported that between fiscal years 2007 and 2011, about half of all states reported counting third party nongovernmental expenditures toward MOE in at least one year, and 17 states reported that they intend to count these expenditures in the future. Potential options are available to provide additional information on non- cash services and state MOE expenditures that may be useful for making decisions regarding the TANF block grant and better ensure accountability for TANF funds (see table 3). In particular, requiring additional information on non-cash services would be consistent with our 2012 Matter for Congressional Consideration on improving performance and reporting information. We have identified a number of potential options that could improve TANF performance and oversight as the program is currently designed, based on our prior work. These options are not intended to be exhaustive, and it is not the purpose of this report to recommend or endorse any particular policy option. In addition, there may be a number of other options that would warrant further analysis. However, it is clear that TANF has evolved beyond a traditional cash assistance program and now also serves as a source of funding for a broad range of services states provide to eligible families. The past 16 years has shown many changes in how states use TANF funds and the populations they serve. Any extension or reauthorization of TANF presents an opportunity to re-examine how it provides assistance to needy families and whether TANF, as currently structured, continues to address Congress' vision for the program. We provided a draft of our report to HHS for review and comment. HHS 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 will be 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) 512-7215 or [email protected]. Contact points for our Offices of Congressional Relations and Public Affairs may be found on the last page of this report. GAO staff who made key contributions to this report are listed in appendix I. In addition to the contact named above, Gale Harris (Assistant Director), Nhi Nguyen, and Michael Pahr made significant contributions to all aspects of this report. Also contributing to this report were James Bennett, Caitlin Croake, Alexander Galuten, Almeta Spencer, and Walter Vance. Temporary Assistance for Needy Families: More Accountability Needed to Reflect Breadth of Block Grant Services. GAO-13-33. Washington, D.C.: December 6, 2012. Temporary Assistance for Needy Families: More States Counting Third Party Maintenance of Effort Spending. GAO-12-929R. Washington, D.C.: July 23, 2012. Temporary Assistance for Needy Families: Update on Program Performance. GAO-12-812T. Washington, D.C.: June 5, 2012. Temporary Assistance for Needy Families: State Maintenance of Effort Requirements and Trends. GAO-12-713T. Washington, D.C.: May 17, 2012. Unemployment Insurance: Economic Circumstances of Individuals Who Exhausted Benefits. GAO-12-408. Washington, D.C.: February 17, 2012. TANF and Child Welfare Programs: Increased Data Sharing Could Improve Access to Benefits and Services. GAO-12-2. Washington, D.C.: October 7, 2011. Temporary Assistance for Needy Families: Update on Families Served and Work Participation. GAO-11-880T. Washington, D.C.: September 8, 2011. Temporary Assistance for Needy Families: Implications of Caseload and Program Changes for Families and Program Monitoring. GAO-10-815T. Washington, D.C.: September 21, 2010. Temporary Assistance for Needy Families: Implications of Recent Legislative and Economic Changes for State Programs and Work Participation Rates. GAO-10-525. Washington, D.C.: May 28, 2010. Temporary Assistance for Needy Families: Fewer Eligible Families Have Received Cash Assistance Since the 1990s, and the Recession's Impact on Caseloads Varies by State. GAO-10-164. Washington, D.C.: February 23, 2010. Welfare Reform: Better Information Needed to Understand Trends in States' Uses of the TANF Block Grant. GAO-06-414. Washington, D.C.: March 3, 2006. Welfare Reform: HHS Should Exercise Oversight to Help Ensure TANF Work Participation Is Measured Consistently across States. GAO-05-821. Washington, D.C.: August 19, 2005. Means-Tested Programs: Information on Program Access Can Be an Important Management Tool. GAO-05-221. Washington, D.C.: March 11, 2005. Welfare Reform: Federal Oversight of State and Local Contracting Can Be Strengthened. GAO-02-661. Washington, D.C.: June 11, 2002. Welfare Reform: States Provide TANF-Funded Services to Many Low- Income Families Who Do Not Receive Cash Assistance. GAO-02-564. Washington, D.C.: April 5, 2002. Welfare Reform: Challenges in Maintaining a Federal-State Fiscal Partnership. GAO-01-828. Washington, D.C.: August 10, 2001.

In 1996, Congress made sweeping changes to federal welfare policy by replacing the previous cash assistance program with the TANF block grant. Since then through fiscal year 2011, the federal government and states have spent a total of nearly $434 billion for TANF. The block grant was reauthorized under the Deficit Reduction Act of 2005, and is currently authorized through September 30, 2013. To inform a potential reauthorization of TANF, GAO was asked to discuss its key findings on TANF performance and oversight from its previous work and identify potential options that would address these findings. This report discusses issues and options in three selected areas: (1) TANF's role in providing cash assistance to low-income families, (2) measurement of TANF work participation, and (3) information on states' use of TANF funds. In addition to summarizing its previous work on these issues, GAO reviewed relevant federal laws, regulations, and agency documents as well as transcripts from relevant congressional hearings from 2009 through 2012 to identify potential options. GAO also spoke with HHS officials and selected three TANF experts with a range of views to share their perspectives on these issues. Temporary Assistance for Needy Families' (TANF) role in providing cash assistance has evolved; fewer eligible families receive cash assistance and the composition of the caseload has changed. GAO noted in 2010 that 87 percent of the dramatic decline from 1995 through 2005 in the number of families receiving cash assistance was due a decline in eligible families participating in TANF, rather than increased incomes. Changes to state TANF programs, such as mandatory work requirements and lower benefits, account in part for this decline. Relatively modest caseload increases in recent years nationwide, as well as decreases in some states, have raised questions about TANF's responsiveness to changing economic conditions. GAO also reported in 2011 that the composition of the TANF caseload has changed, with about 40 percent of cases now comprised of children only, with the adult not receiving benefits, and little known nationwide about state policies for aiding these children. Potential options to better understand TANF's role as a cash assistance program may include: improving information on the extent to which states provide cash assistance to eligible low-income families, and requiring states to include more information--for example in TANF state plans submitted to the Department of Health and Human Services (HHS)--on features such as benefit amounts and services provided. The current approach used to measure the extent to which states engage TANF recipients in work activities as defined by federal law has limitations. GAO reported in 2010 and 2011 that most states relied on several factors allowed in law, including credits for caseload reductions, to reduce the percentage of families they needed to engage in work to meet their work participation rate requirements. GAO also reported that current policies may be discouraging states from serving some families who are not "work-ready" through TANF, such as those with significant barriers to employment or complex needs. Potential options to address these issues may include: eliminating, limiting, or modifying some of the credits states may use to reduce their work participation rate requirements; adjusting requirements to better ensure states engage those not work-ready; and developing an additional or alternate set of measures that focus on employment outcomes. However, more information may be needed to assess the potential impacts of any changes to work participation requirements. Limitations exist in the information available to assess states' use of federal TANF funds and state expenditures related to minimum state spending requirements under TANF, known as maintenance of effort (MOE) requirements. GAO reported in 2012 that the TANF block grant has evolved into a flexible funding stream that states use to support a broad range of non-cash services, but information requirements for assessing TANF performance have not kept pace with this evolution. For example, there are no reporting requirements mandating performance information specifically on families receiving non-cash services or their outcomes. GAO also reported in 2012 that states have reported increased levels of MOE spending for a variety of reasons, including helping them reduce their work participation rate requirements as allowed by law. Potential options to better understand federal and state TANF spending may include: improving reporting and performance information to encompass the full breadth of states' use of TANF funds, and requiring a review of MOE expenditures used to meet TANF requirements. GAO is not making recommendations, but rather identifying some potential options that might improve TANF performance, depending on Congress' goals for the program. These options are not intended to be exhaustive, and there may be a number of other options that warrant further analysis. HHS provided technical comments on a draft of this report.

Handling increasing service workloads is a critical challenge facing SSA. The agency is processing a growing number of claims for Social Security benefits. SSA estimates that it will face continued growth in beneficiaries over the next few decades as the population ages and life expectancies increase. The number of OASI and DI beneficiaries is estimated to increase substantially between calendar years 1997 and 2010--from approximately 44 million to over 54 million. Recognizing constraints on its staff and resources, SSA has moved to better serve its increasing beneficiary population and improve its productivity by redesigning its work processes and modernizing the computer systems used to support these processes. A key aspect of the modernization effort is the agency's transition from its current centralized mainframe-based computer processing environment to a highly distributed client/server processing environment. IWS/LAN is expected to play a critical role in the modernization by providing the basic automation infrastructure for using client/server technology to support the redesigned work processes and improve the availability and timeliness of information to employees and appropriate users. Under this initiative, SSA plans to replace approximately 40,000 "dumb" terminals and other computer equipment used in over 2,000 SSA and state DDS sites with an infrastructure consisting of networks of intelligent workstations connected to each other and to SSA's mainframe computers. The national IWS/LAN initiative consists of two phases. During phase I, SSA plans to acquire 56,500 workstations, 1,742 LANs, 2,567 notebook computers, systems furniture, and other peripheral devices. Implementation of this platform is intended to provide employees in the sites with office automation and programmatic functionality from one terminal. It also aims to provide the basic, standardized infrastructure to which additional applications and functionality can later be added. The projected 7-year life-cycle cost of phase I is $1.046 billion, covering the acquisition, installation, and maintenance of the IWS/LAN equipment. Under a contract with Unisys Corporation, SSA began installing equipment for this phase in December 1996; it anticipates completing these installations in June 1999. Through fiscal year 1997, SSA had reported spending approximately $565 million on acquiring workstations, LANs, and other services. Phase II is intended to build upon the IWS/LAN infrastructure provided through the phase I effort. Specifically, during this phase, SSA plans to acquire additional hardware and software, such as database engines, scanners, bar code readers, and facsimile and imaging servers, needed to support future process redesign initiatives and client/server applications. SSA plans to award a series of phase II contracts in fiscal year 1999 and to carry out actual installations under these contracts during fiscal years 1999 through 2001. Currently, SSA is developing the first major programmatic software application to operate on IWS/LAN. This software--the Reengineered Disability System (RDS)--is intended to support SSA's modernized disability claims process in the new client/server environment. Specifically, RDS is intended to automate and improve the Title II and Title XVI disability claims processes from the initial claims-taking in the field office, to the gathering and evaluation of medical evidence in state DDSs, to payment execution in the field office or processing center and the handling of appeals in hearing offices. In August 1997, SSA began pilot testing RDS for the specific purposes of (1) assessing the performance, cost, and benefits of this software and (2) determining supporting IWS/LAN phase II equipment requirements. Agencies, in undertaking systems modernization efforts, are required by the Clinger-Cohen Act of 1996 to ensure that their information technology investments are effectively managed and significantly contribute to improvements in mission performance. The Government Performance and Results Act of 1993 requires agencies to set goals, measure performance, and report on their accomplishments. One of the challenges that SSA faces in implementing IWS/LAN is ensuring that the planned systems and other resources are focused on helping its staff process all future workloads and deliver improved service to the public. In a letter and a report to SSA in 1993 and 1994, respectively, we expressed concerns about SSA's ability to measure the progress of IWS/LAN because it had not established measurable cost and performance goals for this initiative. In addition, SSA faces the critical challenge of ensuring that all of its information systems are Year 2000 compliant. By the end of this century, SSA must review all of its computer software and make the changes needed to ensure that its systems can correctly process information relating to dates. These changes affect not only SSA's new network but computer programs operating on both its mainframe and personal computers. In October 1997, we reported that while SSA had made significant progress in its Year 2000 efforts, it faced the risk that not all of its mission-critical systems will be corrected by the turn of the century. At particular risk were the systems used by state DDSs to help SSA process disability claims. Our objectives were to (1) determine the status of SSA's implementation of IWS/LAN, (2) assess whether SSA and state DDS operations have been disrupted by the installations of IWS/LAN equipment, and (3) assess SSA's practices for managing its investment in the IWS/LAN initiative. To determine the status of SSA's implementation of IWS/LAN, we analyzed key project documentation, including the IWS/LAN contract, project plans, and implementation schedules. We observed implementation activities at select SSA field offices in Alabama, Florida, Georgia, Minnesota, South Carolina, Texas, and Virginia; at program service centers in Birmingham, Alabama, and Philadelphia, Pennsylvania; and at teleservice centers in Minneapolis, Minnesota, and Fort Lauderdale, Florida. In addition, we reviewed IWS/LAN plans and observed activities being undertaken by state DDS officials in Alabama, Georgia, and Minnesota. We also interviewed representatives of the IWS/LAN contractor--Unisys Corporation--to discuss the status of the implementation activities. To assess whether SSA and state DDS operations have been disrupted by the installations of IWS/LAN equipment, we reviewed planning guidance supporting the implementation process, such as the IWS/LAN Project Plan, and analyzed reports summarizing implementation activities and performance results identified during pilot efforts. We also interviewed SSA site managers, contractor representatives, and IWS/LAN users to identify installation and/or performance issues, and observed operations in select SSA offices where IWS/LAN equipment installations had been completed. In addition, we discussed IWS/LAN problems and concerns with DDS officials in 10 states: Alabama, Arkansas, Arizona, Delaware, Florida, Louisiana, New York, Virginia, Washington, and Wisconsin, and with the president of the National Council of Disability Determination Directors, which is a representative body for all state DDSs. To assess SSA's management of the IWS/LAN investment, we applied our guide for evaluating and assessing how well federal agencies select and manage their investments in information technology resources. We evaluated SSA's responses to detailed questions about its investment review process that were generated from the evaluation guide and compared the responses to key agency documents generated to satisfy SSA's process requirements. We also reviewed IWS/LAN cost, benefit, and risk analyses to assess their compliance with OMB guidance. We did not, however, validate the data contained in SSA's documentation. We performed our work from July 1997 through March 1998 in accordance with generally accepted government auditing standards. We requested comments on a draft of this report from the Commissioner of Social Security or his designee. The Commissioner provided us with written comments, which are discussed in the "Agency Comments and Our Evaluation" section and are reprinted in appendix I. Using a strategy that includes installing workstations and LANs in up to 20 sites per weekend, SSA, through mid-March 1998, had generally met its phase I schedule for implementing IWS/LAN. However, the contractor installing IWS/LAN has expressed concerns about the availability of the workstations specified in the contract, raising questions as to whether they can continue to be acquired. In addition, the pilot effort that SSA began in August 1997 to assess the performance, cost, and benefits of RDS and identify IWS/LAN phase II requirements has experienced delays that could affect the schedule for implementing phase II of this initiative. Under the phase I schedule, 56,500 intelligent workstations and 1,742 LANs are to be installed in approximately 2,000 SSA and state DDS sites between December 1996 and June 1999. The schedule called for approximately 30,500 workstations and about 850 LANs to be installed by mid-March 1998. According to SSA records, the agency generally met this schedule with the actual installation of 31,261 workstations and 850 LANs by March 15, 1998. These installations occurred at 753 SSA sites and 20 DDS sites (covering 12 states and the federal DDS). SSA reported in its fiscal year 1997 accountability report that the number of front-line employees using IWS/LAN increased to 50.2 percent--exceeding by 2.2 percent the fiscal year 1997 Results Act goal. The standard intelligent workstation configuration includes a 100-megahertz Pentium personal computer with 32 megabytes of random access memory, the Windows NT 4.0 operating system, a 1.2-gigabyte hard (fixed) disk drive, 15-inch color display monitor, and 16-bit network card with adaptation cable. Last year the contractor, Unisys, submitted a proposal to upgrade the intelligent workstation by substituting a higher speed processor at additional cost. Unisys noted that it was having difficulty obtaining 100-megahertz workstations. However, SSA did not accept Unisys' upgrade proposal. Further, the Deputy Commissioner for Systems stated that SSA did not believe it was necessary to upgrade to a faster processor because the 100-megahertz workstation meets its current needs. For its modernization efforts to succeed, SSA must have the necessary workstations to support its processing needs. This is particularly important given the agency's expressed intent to operate future client/server software applications on IWS/LAN to support redesigned work processes. Adding database engines, facsimile, imaging, and other features like those planned by SSA during phase II of the IWS/LAN initiative could demand a workstation with more memory, larger disk storage, and a processing speed higher than 100 megahertz. Personal computers available in today's market operate at about three times this speed. Preliminary testing of the RDS software has already shown the need for SSA to upgrade the workstation's random access memory from 32 megabytes to 64 megabytes. However, systems officials told us that their tests have not demonstrated a need for a faster workstation. As discussed in the following section, SSA is encountering problems and delays in completing its tests of the RDS software. In addition, at the conclusion of our review, SSA had begun holding discussions with Unisys regarding the availability of the 100-megahertz workstations. SSA has experienced problems and delays in the pilot effort that it initiated in August 1997 to assess the performance, cost, and benefits of RDS and identify IWS/LAN phase II requirements. Under the pilot, an early release of the software is being tested in one SSA field office and the federal DDS to acquire feedback from end users regarding its performance. SSA planned to make improvements to the software based on these pilot results and then expand its testing of the software to all SSA and DDS components in the state of Virginia. The results of the pilot testing in Virginia were to be used in determining hardware and software requirements to support IWS/LAN phase II acquisitions, beginning in fiscal year 1999. SSA encountered problems with RDS during its initial pilot testing. For example, systems officials stated that, using RDS, the reported productivity of claims representatives in the SSA field office dropped. Specifically, the officials stated that before the installation of RDS, each field office claims representative processed approximately five case interviews per day. After RDS was installed, each claims representative could process only about three cases per day. At the conclusion of our review, systems officials stated that because the RDS software has not performed as anticipated, SSA has entered into a contract with Booz-Allen and Hamilton to independently evaluate and recommend options for proceeding with the development of RDS. In addition, SSA has delayed expanding the pilot by 9 months--from October 1997 to July 1998. This is expected to further delay SSA's national roll-out and implementation of RDS. Moreover, because RDS is essential to identifying IWS/LAN phase II requirements, the Deputy Commissioner for Systems has stated that delaying the pilot will likely result in slippages in SSA's schedule for acquiring and implementing phase II equipment. Nationwide implementation of IWS/LAN is a complex logistical task for SSA, requiring coordination of site preparation (such as electrical wiring and cabling) in over 2,000 remote locations, contractor-supplied and installed furniture and intelligent workstation components, and training of over 70,000 employees in SSA and DDS locations. Moreover, once installed, these systems must be managed and maintained in a manner that ensures consistent and quality service to the public. During our review, staff in the 11 SSA offices that we visited generally stated that they had not experienced any significant disruptions in their ability to serve the public during the installation and operation of IWS/LAN. They attributed the smooth transition to SSA's implementation of a well-defined strategy for conducting site preparations, equipment installations, and employee training. Part of that strategy required equipment installation and testing to be performed on weekends so that the IWS/LAN equipment would be operational by the start of business on Monday. In addition, staff were rotated through training and client service positions and augmented with staff borrowed from other field offices to maintain service to the public during the post-installation training period. Further, because the new workstations provide access to the same SSA mainframe software applications as did the old terminals and LAN equipment, staff were able to process their workloads in a similar manner as with the previous environment. State DDSs generally were less satisfied with the installation and operation of IWS/LAN in their offices. Administrators and systems staff in the 10 DDS sites that we visited expressed concerns about the loss of network management and control over IWS/LAN operations in their offices and dissatisfaction with the service and technical support received from the contractor following the installation of IWS/LAN equipment. In particular, SSA initially planned to centrally manage the operation and maintenance of IWS/LAN equipment. However, DDS officials in 7 of the 10 offices expressed concern that with SSA managing their networks and operations, DDSs can no longer make changes or fixes to their equipment locally and instead, must rely on SSA for system changes or network maintenance. Eight of the 10 DDSs reported that under this arrangement, the IWS/LAN contractor had been untimely in responding to certain of their requests for service, resulting in disruptions to their operations. For example, a DDS official in one state told us that at the time of our discussion, she had been waiting for approximately 2 weeks for the IWS/LAN contractor to repair a hard disk drive in one of the office's workstations. In January 1998, the National Council of Disability Determination Directors (NCDDD), which represents the state DDSs, wrote to SSA to express the collective concerns of the DDSs regarding SSA's plan to manage and control their IWS/LAN networks. NCDDD recommended that SSA pilot the IWS/LAN equipment in one or more DDS office to evaluate options for allowing the states more flexibility in managing their networks. It further proposed that IWS/LAN installations be delayed for states whose operations would be adversely affected by the loss of network control. At least one state DDS--Florida--refused to continue with the roll-out of IWS/LAN in its offices until this issue is resolved. Because IWS/LAN is expected to correct Year 2000 deficiencies in some states' hardware, however, NCDDD cautioned that delaying the installation of IWS/LAN could affect the states' progress in becoming Year 2000 compliant. At the conclusion of our review, the Deputy Commissioner for Systems told us that SSA had begun holding discussions with state officials in early March 1998 to identify options for addressing the states' concerns about the management of their networks under the IWS/LAN environment. Federal legislation and OMB directives require agencies to manage major information technology acquisitions as investments. In implementing IWS/LAN, SSA has followed a number of practices that are consistent with these requirements, such as involving executive staff in the selection and management of the initiative and assessing the cost, benefits, and risks of the project to justify its acquisition. However, SSA's practices have fallen short of ensuring full and effective management of the investment in IWS/LAN because it did not include plans for measuring the project's actual contributions to improved mission performance. According to the Clinger-Cohen Act and OMB guidance, effective technology investment decision-making requires that processes be implemented and data collected to ensure that (1) project proposals are funded on the basis of management evaluations of costs, risks, and expected benefits to mission performance and (2) once funded, projects are controlled by examining costs, the development schedule, and actual versus expected results. These goals are accomplished by considering viable alternatives, preparing valid cost-benefit analyses, and having senior management consistently make data-driven decisions on major projects. SSA followed an established process for acquiring IWS/LAN that met a number of these requirements. For example, senior management reviewed and approved the project's acquisition and has regularly monitored the progress of the initiative against competing priorities, projected costs, schedules, and resource availability. SSA also conducted a cost-benefit analysis to justify its implementation of IWS/LAN. This analysis was based on comparisons of the time required to perform certain work tasks before and after the installation of IWS/LAN equipment in 10 SSA offices selected for a pilot study during January through June 1992. For example, the pilot tested the time savings attributed to SSA employees not having to walk from their desks or wait in line to use a shared personal computer. Based on the before and after time savings identified for each work task, SSA projected annual savings from IWS/LAN of 2,160 workyears that could be used to process growing workloads and improve service. In a review of the IWS/LAN initiative in 1994, the Office of Technology Assessment (OTA) found SSA's cost-benefit analysis to be sufficient for justifying the acquisition of IWS/LAN. Although SSA followed certain essential practices for acquiring IWS/LAN, it has not yet implemented performance goals and measures to assess the impact of this investment on productivity and mission performance. Under the Clinger-Cohen Act, agencies are to establish performance measures to gauge how well their information technology supports program efforts and better link their information technology plans and usage to program missions and goals. Successful organizations rely heavily upon performance measures to operationalize mission goals and objectives, quantify problems, evaluate alternatives, allocate resources, track progress, and learn from mistakes. Performance measures also help organizations determine whether their information systems projects are really making a difference, and whether that difference is worth the cost. The Clinger-Cohen Act also requires that large information technology projects be implemented incrementally and that each phase should be cost effective and provide mission-related benefits. It further requires that performance measures be established for each phase to determine whether expected benefits were actually achieved. In our September 1994 report, we noted that as part of an effort with the General Services Administration (GSA) to develop a "yardstick" to measure the benefits that IWS/LAN will provide the public, SSA had initiated actions aimed at identifying cost and performance goals for IWS/LAN. SSA identified six categories of performance measures that could be used to determine the impact of IWS/LAN technology on service delivery goals and reengineering efforts. It had planned to establish target productivity gains for each measure upon award of the IWS/LAN contract. GSA was to then use these measures to assess IWS/LAN's success. As of March 1998, however, SSA had established neither the target goals to help link the performance measures to the agency's strategic objectives nor a process for using the measures to assess IWS/LAN's impact on agency productivity and mission performance. In addition, although the Clinger-Cohen Act and OMB guidance state that agencies should perform retrospective evaluations after completing an information technology project, SSA officials told us that they do not plan to conduct a post-implementation review of the IWS/LAN project once it is fully implemented. According to the Director of the Information Technology Systems Review Staff, SSA currently does not plan to use any of the measures to assess the project's impact on agency productivity and mission performance because (1) the measures had been developed to fulfill a specific GSA procurement requirement that no longer exists and (2) it believes the results of the pilots conducted in 1992 sufficiently demonstrated the savings that will be achieved with each IWS/LAN installation. It is essential that SSA follow through with the implementation of a performance measurement process for each phase of the IWS/LAN effort. Measuring performance is necessary to show how this investment is contributing to the agency's goal of improving productivity. Among leading organizations that we have observed, managers use performance information to continuously improve organizational processes, identify performance gaps, and set improvement goals. The performance problems that SSA has already encountered in piloting software on IWS/LAN make it even more critical for SSA to implement performance measures and conduct post-implementation reviews for each phase of this initiative. SSA believes that the results of its pilot effort undertaken in 1992 to justify the acquisition of IWS/LAN sufficiently demonstrate that it will achieve its estimated workyear savings. However, the pilot results are not an acceptable substitute for determining the actual contribution of IWS/LAN to improved productivity. In particular, although the pilots assessed task savings for specific functions performed in each office, they did not demonstrate IWS/LAN's actual contribution to improved services gained through improvements in the accuracy of processing or improvements in processing times. In addition, OTA noted in its 1994 review that the relatively small number of pilots may not have adequately tested all the potential problems that could arise when the equipment is deployed at all of SSA's sites. Further, information gained from post-implementation reviews is critical for improving how the organization selects, manages, and uses its investment resources. Without a post-implementation review of each phase of the IWS/LAN project, SSA cannot validate projected savings, identify needed changes in systems development practices, and ascertain the overall effectiveness of each phase of this project in serving the public. Post-implementation reviews also serve as the basis for improving management practices and avoiding past mistakes. SSA is relying on IWS/LAN to play a vital role in efforts to modernize its work processes and improve service delivery, and it has made good progress in implementing workstations and LANs that are a part of this effort. However, equipment availability and capability issues, problems in developing software that is to operate on the IWS/LAN workstations, and concerns among state DDSs that their equipment will not be adequately managed and serviced by SSA, threaten the continued progress and success of this initiative. Moreover, absent target goals and a defined process for measuring performance, SSA will not be able to determine whether its investment in each phase of IWS/LAN is yielding expected improvements in service to the public. To strengthen SSA's management of its IWS/LAN investment, we recommend that the Commissioner of Social Security direct the Deputy Commissioner for Systems to immediately assess the adequacy of workstations specified in the IWS/LAN contract, and based on this assessment, determine (1) the number and capacity of workstations required to support the IWS/LAN initiative and (2) its impact on the IWS/LAN implementation schedule; work closely with state DDSs to promptly identify and resolve network management concerns and establish a strategy for ensuring the compliance of those states relying on IWS/LAN hardware for Year 2000 corrections; establish a formal oversight process for measuring the actual performance of each phase of IWS/LAN, including identifying the impact that each IWS/LAN phase has on mission performance and conducting post-implementation reviews of the IWS/LAN project once it is fully implemented. In commenting on a draft of this report, SSA generally agreed with the issues we identified and described actions that it is taking in response to our recommendations to resolve them. These actions include (1) determining remaining IWS/LAN workstation needs, (2) addressing state DDS network management concerns and related Year 2000 compliance issues, and (3) implementing a performance measurement strategy for the IWS/LAN initiative. These actions are important to the continued progress and success of the IWS/LAN initiative, and SSA must be diligent in ensuring that they are fully implemented. In responding to our first recommendation to assess the adequacy of workstations specified in the IWS/LAN contract, SSA stated that it had determined the number of workstations required to complete the IWS/LAN implementation and was working on a procurement strategy and schedule for this effort. SSA also stated that its current tests do not show a need for workstations with a processing speed higher than 100 megahertz. The agency further noted that terms and conditions in the IWS/LAN contract will enable it to acquire a higher powered computer or other technology upgrades when the need arises. As discussed earlier in our report, it is important that SSA have the necessary workstations to support its processing needs in the redesigned work environment. Therefore, as SSA continues its aggressive pace in implementing IWS/LAN, it should take all necessary steps to ensure that it has fully considered its functional requirements over the life of these workstations. Doing so is especially important since SSA has encountered problems and delays in completing tests of the RDS software that are vital to determining future IWS/LAN requirements. Our second recommendation concerned SSA's working closely with state DDSs to identify and resolve network management concerns and establish a strategy for ensuring the compliance of those states relying on IWS/LAN hardware for Year 2000 corrections. SSA identified various actions, which if successfully implemented, could help resolve DDS concerns regarding network management and the maintenance of IWS/LAN equipment, and facilitate its efforts in becoming Year 2000 compliant. In responding to our final recommendation that it establish a formal oversight process for measuring the actual performance of each phase of IWS/LAN, SSA agreed that performance goals and measures should be prescribed to determine how well information technology investments support its programs and provide expected results. SSA stated that it is determining whether expected benefits are being realized from IWS/LAN installations through in-process and postimplementation assessments. SSA further noted that its planning and budgeting process ensures that it regularly assesses the impact of IWS/LAN on agency productivity and mission performance. However, during the course of our review, SSA could not provide specific information to show how its planning and budgeting process and data on workyear savings resulting from IWS/LAN installations were being used to assess the project's actual contributions to improved productivity and mission performance. In addition, two of the three measures that SSA identified in its response--the number of IWS/LANs installed per month and existing terminal redeployment and phase-out--provide information that is more useful for assessing the progress of SSA's IWS/LAN installations and existing terminal redeployment efforts. To ensure that its investments are sound, it is crucial that SSA develop measures to assess mission-related benefits, and use them in making project decisions. We will continue to monitor SSA's efforts in assessing the benefits of IWS/LAN installations through its in-process and postimplementation assessments and its planning and budgeting process. We are sending copies of this report to the Commissioner of Social Security; the Director of the Office of Management and Budget; appropriate congressional committees; and other interested parties. Copies will also be made available to others upon request. Please contact me at (202) 512-6253 or by e-mail at [email protected] if you have any questions concerning this report. Major contributors to this report are listed in appendix II. Pamlutricia Greenleaf, Senior Evaluator Kenneth A. Johnson, Senior Information Systems Analyst 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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Pursuant to a congressional request, GAO reviewed the Social Security Administration's (SSA) ongoing efforts to implement its intelligent workstation/local area network (IWS/LAN) project, focusing on: (1) determining the status of SSA's implementation of IWS/LAN; (2) assessing whether SSA and state disability determination service (DDS) operations have been disrupted by the installations of IWS/LAN equipment; and (3) assessing SSA's practices for managing its investment in IWS/LAN. GAO noted that: (1) SSA has moved aggressively in installing intelligent workstations and LANs since initiating IWS/LAN acquisitions in December 1996; (2) as of mid-March 1998, it had completed the installation of about 31,000 workstations and 850 LANs, generally meeting its implementation schedule for phase I of the initiative; (3) the contractor that is installing IWS/LAN has expressed concerns about the future availability of the intelligent workstations that SSA is acquiring; (4) problems encountered in developing software intended to operate on IWS/LAN could affect SSA's planned schedule for proceeding with phase II of this initiative; (5) staff in SSA offices generally reported no significant disruptions in their ability to serve the public during the installation and operation of their IWS/LAN equipment; (6) some state DDSs reported that SSA's decision to manage and control DDS networks remotely and the IWS/LAN contractor's inadequate responses to DDS' service calls have led to disruptions in some of their operations; (7) because IWS/LAN is expected to correct year 2000 deficiencies in some states' hardware, delaying the installation of IWS/LAN could affect states' progress in becoming year 2000 compliant; (8) consistent with the Clinger-Cohen Act of 1996 and Office of Management and Budget guidance, SSA has followed some of the essential practices required to effectively manage its IWS/LAN investment; (9) SSA has not established essential practices for measuring IWS/LAN's contribution to improving the agency's mission performance; (10) although the agency has developed baseline data and performance measures that could be used to assess the project's impact on mission performance, it has not defined target performance goals or instituted a process for using the measures to assess the impact of IWS/LAN on mission performance; (11) SSA does not plan to conduct a post-implementation review of IWS/LAN once it is fully implemented; and (12) without targeted goals and a defined process for measuring performance both during and after the implementation of IWS/LAN, SSA cannot be assured of the extent to which this project is improving service to the public or that it is actually yielding the savings anticipated from this investment.

The CARE Act was enacted in 1990 to respond to the needs of individuals and families living with HIV or AIDS and to direct federal funding to areas disproportionately affected by the epidemic. The Ryan White CARE Act Amendments of 1996 and the Ryan White CARE Act Amendments of 2000 modified the original funding formulas. For example, prior to the 1996 amendments, the CARE Act required that for purposes of determining grant amounts a metropolitan area's caseload be measured by a cumulative count of AIDS cases recorded in the jurisdiction since reporting began in 1981. The 1996 amendments required the use of ELCs instead of cumulative AIDS cases. Because this switch would have resulted in large shifts of funding away from jurisdictions with a longer history of the disease than other jurisdictions, due in part to a higher proportion of deceased cases, the 1996 CARE Act amendments added a hold-harmless provision under Title I, as well as under Title II, that limits the extent to which a grantee's funding can decline from one year to the next. Titles I and II also provide for other grants to subsets of eligible jurisdictions either by formula or by a competitive process. For example, in addition to AIDS Drug Assistance Program (ADAP) base grants, Title II also authorizes grants for states and certain territories with demonstrated need for additional funding to support their ADAPs. These grants, known as Severe Need grants, are funded through a set-aside of funds otherwise available for ADAP base grants. Title II also authorizes funding for "Emerging Communities," which are communities affected by AIDS that have not had a sufficient number of AIDS cases reported in the last 5 calendar years to be eligible for Title I grants as EMAs. In addition, Title II contains a minimum-grant provision that guarantees that no grantee will receive a Title II base grant less than a specified funding amount. Metropolitan areas heavily affected by HIV/AIDS have always been recognized within the structure of the CARE Act. In 1995 we reported that, with combined funding under Title I and Title II, states with EMAs receive more funding per AIDS case than states without EMAs. To adjust for this situation, the 1996 amendments instituted a two-part formula for Title II base grants that takes into account the number of ELCs that reside within a state but outside of any EMA. Under this distribution formula, 80 percent of the Title II base grant is based upon a state's proportion of all ELCs, and 20 percent of the base grant is based on a state's proportion of ELCs outside of EMAs relative to all such ELCs in all states and territories. A second provision included in 1996 protected the eligibility of EMAs. The 1996 amendments provided that a jurisdiction designated as an EMA for that fiscal year would be "grandfathered" so it would continue to receive Title I funding even if its reported number of AIDS cases dropped below the threshold for eligibility. Table 1 describes CARE Act formula grants for Titles I and II. The 2000 amendments provided for HIV case counts to be incorporated in the Title I and Title II funding formulas as early as fiscal year 2005 if such data were available and deemed "sufficiently accurate and reliable" by the Secretary of Health and Human Services. They also required that HIV data be used no later than the beginning of fiscal year 2007. In June 2004 the Secretary of Health and Human Services determined that HIV data were not yet ready to be used for the purposes of distributing formula funding under Title I and Title II of the CARE Act. Provisions in the CARE Act funding formulas result in a distribution of funds among grantees that does not reflect the relative distribution of AIDS cases in these jurisdictions. We found that provisions affect the proportional allocation of funding as follows: (1) the AIDS case-count provisions in the CARE Act result in a distribution of funding that is not reflective of the distribution of persons living with AIDS, (2) CARE Act provisions related to metropolitan areas result in variability in the amounts of funding per ELC among grantees, and (3) the CARE Act hold- harmless provisions and grandfather clause protect the funding of certain grantees. Provisions in the CARE Act use measurements of AIDS cases that do not reflect an accurate count of people currently living with AIDS. Eligibility for Title I funding and Title II Emerging Communities grants, as well as the amounts of the Emerging Communities grants, is based on cumulative totals of AIDS cases reported in the most recent 5-year period. This results in funding not being distributed according to the current distribution of the disease. For example, because Emerging Communities funding is determined by using 5-year cumulative case counts, allocations could be based in part on deceased cases, that is, people for whom AIDS was reported in the past 5 years but who have since died. In addition, these case counts do not take into account living cases in which AIDS was diagnosed more than 5 years earlier. Consequently, 5-year cumulative case counts can substantially misrepresent the number of AIDS patients in these communities. The use of ELCs as provided for in the CARE Act can also lead to inaccurate estimates of living AIDS cases. Currently, Title I, Title II, and ADAP base funding, which constitute the majority of formula funding, are distributed according to ELCs. ELCs are an estimate of living AIDS cases calculated by applying annual national survival weights to the most recent 10 years of reported AIDS cases and adding the totals from each year. This method for estimating cases was first included in the CARE Act Amendments of 1996. At that time, this approach captured the vast majority of living AIDS cases. However, some persons with AIDS now live more than 10 years after their cases are first reported, and they are not accounted for by this formula. Thus, like the 5-year reported case counts, ELCs can misrepresent the number of living AIDS cases in an area in part by not taking into account those persons living with AIDS whose cases were reported more than 10 years earlier. When total Title I and Title II funding is considered, states with EMAs and Puerto Rico receive more funding per ELC than states without EMAs because cases within EMAs are counted twice, once in connection with Title I base grants and once for Title II base grants. Eighty percent of the Title II base grant is determined by the total number of ELCs in the state or territory. The remaining 20 percent is based on the number of ELCs in each jurisdiction outside of any EMA. This 80/20 split was established by the 1996 CARE Act amendments to address the concern that grantees with EMAs received more total Title I and Title II funding per case than grantees without EMAs. However, even with the 80/20 split, states with EMAs and Puerto Rico receive more total Title I and Title II funding per ELC than states without EMAs. States without EMAs receive no funding under Title I, and thus, when total Title I and Title II funds are considered, states with EMAs and Puerto Rico receive more funding per ELC. Table 2 shows that the higher the percentage of a state's ELCs within EMAs, the more that state received in total Title I and Title II funding per ELC. The two-tiered division of Emerging Communities also results in disparities in funding among metropolitan areas. Title II provides for a minimum of $10 million to states with metropolitan areas that have 500 to 1,999 AIDS cases reported in the last 5 calendar years but do not qualify for funding under Title I as EMAs. The funding is equally split so that half the funding is divided among the first tier of communities with 500 to 999 reported cases in the most recent 5 calendar years while the other half is divided among a second tier of communities with 1,000 to 1,999 reported cases in that period. In fiscal year 2004, the two-tiered structure of Emerging Communities funding led to large differences in funding per reported AIDS case in the last 5 calendar years among the Emerging Communities because the total number of AIDS cases in each tier was not equal. Twenty-nine communities qualified for Emerging Communities funds in fiscal year 2004. Four of these communities had 1,000 to 1,999 reported AIDS cases in the last 5 calendar years and 25 communities had 500 to 999 cases. This distribution meant that the 4 communities with a total of 4,754 reported cases in the last 5 calendar years split $5 million while the remaining 25 communities with a total of 15,994 reported cases in the last 5 calendar years also split $5 million. These case counts resulted in the 4 communities receiving $1,052 per reported case while the other 25 received $313 per reported case. Table 3 lists the 29 Emerging Communities along with their reported AIDS case counts over the most recent 5 years and their funding. Titles I and II of the CARE Act both contain provisions that protect certain grantees' funding levels. Title I has a hold-harmless provision that guarantees that the Title I base grant to an EMA will be at least as large as a statutorily specified percentage of a previous year's funding. The Title I hold-harmless provision has primarily protected the funding of one EMA, San Francisco. If an EMA qualifies for hold-harmless funding, that amount is added to the base funding and distributed together as the base grant. In fiscal year 2004, the San Francisco EMA received $7,358,239 in hold-harmless funding, or 91.6 percent of the hold-harmless funding that was distributed. The second largest recipient was Kansas City, which received $134,485, or 1.7 percent of the hold-harmless funding under Title I. Table 4 lists the EMAs that received hold-harmless funding in fiscal year 2004. Because San Francisco's Title I funding reflects the application of hold-harmless provisions under the 1996 amendments, as well as under current law, San Francisco's Title I base grant is determined in part by the number of deceased cases in the San Francisco EMA as of 1995. More than half of the 51 EMAs received Title I funding in fiscal year 2004 even though they were below Title I eligibility thresholds. The eligibility of these EMAs was protected based on a CARE Act grandfather clause. Under a grandfather clause established by the CARE Act Amendments of 1996, metropolitan areas eligible for funding for fiscal year 1996 remain eligible for Title I funding even if the number of reported cases in the most recent 5 calendar years drops below the statutory threshold. We found that in fiscal year 2004, 29 of the 51 EMAs did not meet the eligibility threshold of more than 2,000 reported AIDS cases during the most recent 5 calendar years but nonetheless retained their status as EMAs (see fig. 1). The number of reported AIDS cases in the most recent 5 calendar years in these 29 EMAs ranged from 223 to 1,941. Title I funding awarded to these 29 EMAs was about $116 million, or approximately 20 percent of the total Title I funding. Title II has a hold-harmless provision that ensures that the total of Title II and ADAP base grants awarded to a grantee will be at least as large as the total of these grants a grantee received the previous year. This provision has the potential of reducing the amount of funding to grantees that have demonstrated severe need for drug treatment funds because the hold- harmless provision is funded out of amounts that would otherwise be used for that purpose. Fiscal year 2004 was the first time that any grantees triggered this provision. Severe Need grants are funded by a 3 percent set- aside of the funds appropriated specifically for ADAPs. Eight states became eligible for this hold-harmless funding in fiscal year 2004. In 2004, the 3 percent set-aside for Severe Need grants was $22.5 million. Of these funds, $1.6 million, or 7 percent, was used to provide this Title II hold- harmless protection. (See table 5.) The remaining $20.8 million, or 93 percent of the set-aside amount, was distributed in Severe Need grants. The total amount of Severe Need grant funds available in fiscal year 2004 to distribute among the eligible grantees was less than it would have been without the hold-harmless payments. However, in fiscal year 2004 not all 25 of the Title II grantees eligible for Severe Need grants made the match required to receive such grants. In future years, if all of the eligible Title II grantees make the match, and if there are also grantees that qualify to receive hold-harmless funds under this provision, grantees with severe need for ADAP funding would get less than the amounts they would otherwise receive. CARE Act funding for Title I, Title II, and ADAP base grants would have shifted among grantees if HIV case counts had been used with ELCs, instead of ELCs alone, to allocate fiscal year 2004 formula grants. Our analyses indicate that up to 13 percent of funding would have shifted among grantees if HIV case counts and ELCs had been used to allocate the funds and if the hold-harmless and minimum-grant provisions we considered were maintained. Some individual grantees would have had changes that more than doubled their funding. Grantees in the South and Midwest would generally have received more funding if HIV cases were used in funding formulas along with ELCs. However, there would have been grantees that would have received increased funding and grantees that would have received decreased funding in every region of the country. Funding changes in our model would have been larger without the hold- harmless and minimum-grant provisions that we included. Changes in CARE Act funding levels for Title I base grants, Title II base grants, and ADAP base grants caused by shifting to HIV cases and ELCs would be larger--up to 24 percent--if the current hold-harmless or minimum-grant amounts were not in effect. One explanation for the changes in funding allocations when HIV cases and ELCs are used instead of only ELCs is the maturity of HIV case- reporting systems. Case-reporting systems need several years to become fully operational. We found that those grantees that would receive increased funding from the use of HIV cases tend to be those with the oldest HIV case-reporting systems. Those grantees with the oldest reporting systems include 11 southern and 8 midwestern states whose HIV-reporting systems were implemented prior to 1995. Funding changes can also be linked to whether a jurisdiction has a name- or code-based system. CDC will only accept name-based case counts as no code-based system had met its quality criteria as of January 2006. CDC does not accept the code-based data principally because methods have not been developed to make certain that a code-reported HIV case is only being counted once across all reporting jurisdictions. As a result, if HIV case counts were used in funding formulas, HIV cases reported using codes rather than names would not be counted in distributing CARE Act funds. However, even if code-based data were incorporated into the CDC case counts, the age of the code-based systems could still be a factor since the code-based systems tend to be newer than the name-based systems. As of December 2005, 12 of the 13 code-based systems were implemented in 1999 or later, compared with 10 of the 39 name-based systems. The effect of the maturity of the code-based systems could be increased if, as CDC believes, name-based systems can be executed with more complete coverage of cases in much less time than code-based systems. As a result, jurisdictions with code-based systems could find themselves with undercounts of HIV cases for longer periods of time than jurisdictions with name-based systems. Figure 2 shows the 39 jurisdictions where HIV case counts are accepted by CDC and the 13 jurisdictions where they are not accepted, as of December 2005. The use of HIV cases in CARE Act funding formulas could result in fluctuations in funding over time because of newly identified preexisting HIV cases. Grantees with more mature HIV-reporting systems have generally identified more of their HIV cases. Therefore, if HIV cases were used to distribute funding, these grantees would tend to receive more funds. As grantees with newer systems identify and report a higher percentage of their HIV cases, their proportion of the total number of ELCs and HIV cases in the country would increase and funding that had shifted away from states with newer HIV-reporting systems would shift back, creating potentially significant additional shifts in program funding. The funding provided under the CARE Act has filled important gaps in communities throughout the country, but as Congress reviews CARE Act programs, it is important to understand how much funding can vary across communities with comparable numbers of persons living with AIDS. In our report, we raised several matters for Congress to consider when reauthorizing the CARE Act. We reported in February 2006 that if Congress wishes CARE Act funding to more closely reflect the distribution of persons living with AIDS, and to more closely reflect the distribution of persons living with HIV/AIDS when HIV cases are incorporated into the funding formulas, it should take the following five actions: revising the funding formulas used to determine grantee eligibility and grant amounts using a measure of living AIDS cases that does not include deceased cases and reflects the longer lives of persons living with AIDS, eliminating the counting of cases in EMAs for Title I base grants and again for Title II base grants, modifying the hold-harmless provisions for Title I, Title II, and ADAP base grants to reduce the extent to which they prevent funding from shifting to areas where the epidemic has been increasing, modifying the Title I grandfather clause, which protects the eligibility of metropolitan areas that no longer meet the eligibility criteria, and eliminating the two-tiered structure of the Emerging Communities program. We also reported that if Congress wishes to preserve funding for the ADAP Severe Need grants, it should revise the Title II hold-harmless provision that is funded with amounts set aside for ADAP Severe Need Grants. In commenting on our draft report HHS generally agreed with our identification of issues in the funding formulas. Mr. Chairman, this completes my prepared statement. I would be happy to respond to any questions you or other members of the subcommittee may have at this time. For further information regarding this statement, please contact Marcia Crosse at (202) 512-7119 or [email protected]. Contact points for our Offices of Congressional Relations and Public Affairs may be found on the last page of this statement. James McClyde, Assistant Director; Robert Copeland; Cathy Hamann; Opal Winebrenner; Craig Winslow; and Suzanne Worth contributed to this statement. This is a work of the U.S. government and is not subject to copyright protection in the United States. It may be reproduced and distributed in its entirety without further permission from GAO. However, because this work may contain copyrighted images or other material, permission from the copyright holder may be necessary if you wish to reproduce this material separately.

The CARE Act, a federal effort to address the HIV/AIDS epidemic, is administered by HHS. The Act uses formulas based upon a grantee's number of AIDS cases to distribute funds to eligible metropolitan areas (EMA), states, and territories. The use of AIDS cases was prescribed because most jurisdictions tracked and reported only AIDS cases when the grant programs were established. HIV cases must be incorporated with AIDS cases in CARE Act formulas no later than fiscal year 2007. GAO was asked to discuss factors that affect the distribution of CARE Act funding. This testimony is based on HIV/AIDS: Changes Needed to Improve the Distribution of Ryan White CARE Act and Housing Funds, GAO-06-332 (Feb. 28, 2006). GAO discusses how specific funding-formula provisions contribute to funding differences among CARE Act grantees and what distribution differences could result from using HIV cases in CARE Act funding formulas. Multiple provisions in the CARE Act grant funding formulas as enacted result in funding not being comparable per AIDS case across grantees. First, the CARE Act uses measures of AIDS cases that do not accurately reflect the number of persons living with AIDS. For example, the statutory funding formulas require the use of cumulative AIDS case counts, which could include deceased cases. Second, CARE Act provisions related to metropolitan areas result in variability in the amounts of funding per AIDS case among grantees. For example, AIDS cases within EMAs are counted once for determining funding under Title I of the CARE Act for EMAs and again under Title II for determining funding for the states and territories in which those EMAs are located. As a result, states with EMAs receive more total funding per AIDS case than states without EMAs. Third, CARE Act hold-harmless provisions under Titles I and II and the grandfather clause for EMAs under Title I sustain funding and eligibility of CARE Act grantees on the basis of a previous year's measurements of the number of AIDS cases in these jurisdictions. For example, the CARE Act Title I hold-harmless provision results in one EMA continuing to have deceased AIDS cases factored into its allocation because its hold-harmless funding dates back to the mid-1990s when formula funding was based on a count of AIDS cases from the beginning of the epidemic. If HIV case counts had been incorporated along with the number of estimated living AIDS cases (ELC) in allocating fiscal year 2004 CARE Act grants instead of ELCs alone, funding would have shifted among jurisdictions. Grantees in the South and the Midwest generally would have received more funding if HIV cases were used in the funding formulas, but there would have been grantees that would have received increased funding and grantees that would have received decreased funding in every region of the country. Although CARE Act grantees have established HIV case-reporting systems, differences between these systems--in their maturity and reporting methods, for instance--would have affected the distribution of CARE Act funds based on ELCs and HIV case counts. Grantees with more mature HIV-reporting systems would tend to receive more funds.

IRS's key filing season efforts are processing electronic and paper individual income tax returns and issuing refunds, as well as providing assistance or services to taxpayers. As already noted, processing and assistance were complicated this year by three tax system changes: TETR, the split refund option, and enactment in December 2006 of tax law changes. From January 1 through March 30, 2007, IRS processed 76.8 million returns, about the same number as last year, and issued 68.3 million refunds for $163.4 billion compared to 66.7 million refunds for $154.4 billion at the same time last year. Over 69.3 percent of all refunds were directly deposited into taxpayers' accounts, up 6.2 percent over the same time last year. Direct deposits are faster and more convenient for taxpayers than mailing paper checks. According to IRS data and officials, performance is comparable to last year. IRS is meeting most of its performance goals, including deposit error rate, which is the percentage of deposits applied in error, such as being posted to the wrong tax year. Groups and organizations we spoke with, including the National Association of Enrolled Agents, the American Institute of Certified Public Accountants, and a large tax preparation company, corroborated IRS's view that filing season performance is comparable to last year. IRS uses two systems for storing taxpayer account information--the antiquated Master File legacy system and CADE. The latest release of CADE became operational in early March, 2 months behind schedule because of problems identified during testing. IRS had originally planned to post 33 million taxpayer returns to CADE and the remaining 100 million individual returns on the legacy system. However, as a result of the delay, officials expect to post approximately 17 -19 million taxpayer returns to CADE. Although this is significantly less than planned, it is almost two and a half times the approximate 7.4 million taxpayer accounts posted last year on CADE. Taxpayers eligible for a refund this year whose returns are posted to CADE will benefit from CADE's faster processing, receiving their refunds 1-5 days faster for direct deposit and 4-8 days faster for paper checks than if their return had been processed on the legacy system. The remaining 14 - 16 million returns that were to have been processed on CADE were instead processed by the legacy system and thus did not receive the benefit of faster refunds. The CADE setback may impact IRS's ability to deliver the expanded functionality of future versions of CADE, thus delaying the transition to the new processing system (discussed further in the BSM section of this testimony). The growth rate for electronic filing is up from the same period last year. As of March 30, over 56.9 million (74.1 percent) of all individual income tax returns were filed electronically. This is up 5.8 percent over the same time last year, and an increase over the previous years' growth of 3.3 percent. We previously reported that state mandates for electronic filing of state tax returns also encourage electronic filing of both state and federal tax returns and last year, we suggested that Congress consider mandating electronic filing by paid tax preparers meeting criteria such as a threshold for number of returns filed. Last year, electronic filing of federal returns increased 27 percent for the three states (New York, Connecticut, and Utah) with new 2006 mandates. This year, state mandates are likely to continue to show a positive effect on federal electronic filing because, with the addition of West Virginia, 13 states now have state mandates. Compared to processing paper returns, electronic filing reduces IRS's costs by reducing staff devoted to processing. In 2006, IRS used almost 1,700 (36 percent) fewer staff years for processing paper tax returns than in 1999, shown in figure 1. IRS estimates this saved the agency $78 million in salary, benefits, and overtime in 2006. Electronic filing also improves service to taxpayers. Returns are more accurate because of built-in computer checks and reduced transcription errors (paper returns must be transcribed in IRS's computers--a process that inevitably introduces errors). Electronic filing also provides faster refunds. Although electronic filing continues to grow, taxpayers' use of the Free File program continues to decline. The Free File program, accessible through IRS's Web site, is an alliance of companies that have an agreement with IRS to provide free on-line tax preparation and electronic filing on their Web sites for taxpayers below an adjusted gross income ceiling of $52,000 in 2007. About 95 million (70 percent) of all taxpayers are eligible for free file. Under the agreement, companies are not allowed to offer refund anticipation loans and checks, or other ancillary products, to free file participants. Although IRS has increased its marketing efforts, the agency has not been successful in increasing free file use. As of March 17, 2007, IRS processed about 2.6 million free file returns, which is a decrease of 5.2 percent from the same period last year. While all 19 companies participating in the Free File program allow for TETR requests, only 3 of the 19 companies offer Form 1040 EZ-T requests. We recently reported to this Committee on states' experience with return preparation and electronic filing on their Web sites. These systems, called I-file, provide taxpayers with another option for preparing and electronically filing their tax returns. To the extent that the I-file systems convert taxpayers from paper to electronic filing, the costs of processing returns are reduced. For the eight states we profiled, I-file benefits and costs were relatively modest. While state I-file systems generated benefits, such as increased electronic filing, the overall benefits were limited by low usage, which ranged from about 1 percent to just over 5 percent of eligible taxpayers. Restrictions on taxpayer eligibility and system features helped keep costs modest. States varied in whether they used contractors to develop and operate the I-file system. For the states we profiled, it is unclear whether benefits were greater than costs, in part, because of the low number of taxpayers who converted from paper to electronic filing. IRS's potential to realize net cost savings from an I-file system depends on the costs of developing the system and the number of taxpayers converted from paper. IRS's costs to provide a new I-file service could be higher than states' for several reasons: (1) the federal tax system is more complex, (2) unlike some states that already had transactional Web sites, IRS would need to develop the capability to receive tax returns on its Web site, and (3) developing an I-file system could further stretch IRS's capability to manage systems development, an area we have designated high risk since 1995. The key to IRS achieving a net cost savings depends on the number of individuals converted from paper to electronic filing and the savings per return estimated to be $2.36 by IRS. It is uncertain how many of the 58 million taxpayers who filed on paper would convert. The over 13 million taxpayers who self-prepare their returns on a computer but print them out and mail them to IRS are an attractive target for I-file because they already have access to a computer and may be more willing to try I-file. However, IRS's Free File program, designed to attract similar taxpayers, had low use in 2006, with only 4 million users (about 3 percent of total taxpayers and 4 percent of eligible taxpayers). TETR and split refund volume have been less than IRS projected. Almost 69 percent of individuals who filed individual income tax returns by the end of March have requested TETR, although all who paid the excise tax were eligible for the refund. IRS projected that 10 to 30 million individuals who did not have a tax filing obligation could claim TETR. Approximately 410,000 individuals from this group have asked for a TETR refund (2.8 percent of the 14.5 million IRS expected by this time). As of March 24, fewer than 61,000 individual taxpayers chose to split their refunds into different accounts out of the 44.8 million taxpayers who had their refunds directly deposited. This volume compares to the 3.8 million IRS projected for the filing season. IRS delayed processing a small number of returns claiming tax extender provisions until February 3 to complete changes to its tax processing systems. The number of calls to IRS's toll-free telephone lines has been less than last year and is significantly less than in 2002 for both automated and live assistance (see table 1). Similar to last year, IRS assistors answered about 40 percent of the total calls, while the rest of the calls were answered by an automated menu of recordings. Taxpayers' ability to access IRS's telephone assistors is somewhat less than last year, but IRS is meeting its goals. As shown in table 2, the percentage of taxpayers who attempted to reach an assistor and actually got through and received services--referred to as the level of service-- was one percentage point less than the same time period last year. This level of performance is slightly greater than IRS's fiscal year goal of 82 percent which is the same as last year's goal. Average speed of answer, which is the length of time taxpayers wait to get their calls answered, is just over 4 minutes, almost 40 percent longer than last year, but is better than IRS's annual goal of 4.3 minutes. Taxpayer disconnects, which is the rate at which taxpayers waiting to speak with an assistor abandoned their calls to IRS, increased to 12.3 percent to about 1.4 million calls compared to the same time period last year. While IRS disconnects are a smaller percentage of all calls it receives, those disconnects were down from approximately 491,000 at this time last year to 148,000 (a 70 percent decline). Using a statistical sampling process, IRS estimates that the accuracy of telephone assistors' responses to tax law and account questions to be comparable to the same time period last year. IRS officials noted that there was unprecedented hiring for fiscal year 2007, and while every employee working tax law applications completes a requisite certification process, new employees will be less productive than seasoned employees. IRS has implemented several initiatives, such as targeted monitoring of staff and mini-training sessions, to assist the new hires. IRS officials reported that tax system changes have had minimal impact on telephone operations so far this filing season. TETR-related calls are a small fraction of what IRS projected. Between January 1 and March 10, 2007, IRS expected 7.5 million TETR-related calls, but received about 370,000. This represented 1.8 percent of total calls received by IRS. IRS hired 650 full-time equivalents in fiscal year 2007, with the expectation that those hires would be used to cover anticipated attrition in 2008. Their first assignment was answering TETR telephone calls. They were also trained to handle other accounts calls and paper inventory should the demand for TETR assistance not materialize. IRS anticipated little impact on telephone service from the split refund option and tax provision extenders. For split refunds, IRS anticipated it would receive about 7,000 calls compared to the 70 million total calls it receives each year. IRS did not have projections for tax provision extenders. Use of IRS's Web site has increased so far this filing season compared to prior years except for downloads of forms and publications and tax law questions. From January 1 through February 28, IRS's Web site was visited more often and the number of searches increased. The number of downloaded forms and publications has decreased 14 percent over the same period compared to last year. According to IRS officials, it is too early in the filing season to determine why downloads have decreased. In terms of new features, IRS added a state deduction calculator this filing season, which IRS wants to use as a new standard for developing other on line calculators. Web site assistance is important because it is available to taxpayers 24 hours a day and it is less costly to provide than telephone and walk-in assistance. Table 3 IRS Web Site Use, 2006 and 2007 (data are in thousands) In addition to the Free File program, IRS's Web site offers several important features, such as Where's My Refund, which allows taxpayers to check on the status of their refunds. This year, the feature allows taxpayers to check on the status of split refunds, and tells the taxpayer if one or more of the deposits were returned from the bank because of an incorrect routing or account number. However, for certain requests, the feature is not useful. For example, IRS stopped some refunds related to TETR requests, but Where's My Refund informed taxpayers that their refunds had been issued. Further, if taxpayers make a mistake calculating the amount of their refund the feature would indicate that IRS corrected the refund amount, but will not show the new amount. IRS is considering providing more information about taxpayer accounts on its Web site is part of IRS's strategy to improve taxpayer services at reduce costs. There is further evidence that IRS's Web site is performing well as these examples show. According to the American Customer Satisfaction Index, IRS's Web site is scoring above other government agencies, nonprofits, and private sector firms for customer satisfaction (74 for IRS versus 72 for all government agencies surveyed and 71 for all Web sites surveyed). An independent weekly study by Keynote, a company that evaluates Web sites, reported that IRS's Web site has repeatedly ranked in the top 6 out of 40 government agency Web sites evaluated in terms of average download time. Last year, IRS consistently ranked second for the same time period. Average download time remained about the same for IRS compared to last year, indicating that IRS is not performing worse but that other government agencies are performing better. On the basis of our own searches, we found IRS's Web site to be readily accessible, easy to navigate, and easy to search. As of March 17, 2007, approximately 2 million taxpayers used IRS's 401 walk-in sites, which is comparable to the same period last year. Figure 2 shows the trend in walk-in site use for the entire filing season including a slight projected decline in 2007. At walk-in sites, staff provide taxpayers with information about their tax accounts, answer a limited scope of tax law questions about, for example, to income and filing status, and provide limited tax return preparation assistance. As of March 10, 6,700 taxpayers have requested TETR on Form 1040EZ-T at walk-in sites, which is 5.3 percent of the 126,000 individuals IRS expected. IRS officials attribute this year's projected decline in walk-in use to taxpayers' increased use of tax preparation software and IRS.gov. This decline has allowed IRS to devote 4 percent fewer full-time equivalents compared to last year for walk-in assistance (down from 187 to 179 full- time equivalents). Volunteer sites, often run by community-based organizations and staffed by volunteers who are trained and certified by IRS, do not offer the range of services provided at walk-in sites. Instead, volunteer sites focus on preparing tax returns primarily for low-income and elderly taxpayers and operate chiefly during the filing season. The number of taxpayers getting return preparation assistance at over 11,000 volunteer sites has increased to approximately 1.3 million, up 8 percent from last year and continuing a trend since 2001. Although no projections have been made for TETR claims, over 33,000 taxpayers have claimed this credit at these locations. We have reported that the shift of taxpayers from walk-in to volunteer sites is important because it has allowed IRS to transfer time-consuming services, such as return preparation, from IRS to other less costly alternatives that can be more convenient for taxpayers. While IRS is collecting better data on the quality of service at walk-in sites, concerns about quality of the data and service remain. According to IRS, it is measuring the accuracy of tax law and accounts assistance. IRS has reported a goal for tax law accuracy, and plans to use data collected for 2007 to set an annual goal for accounts accuracy. While IRS provides return assistance for 125,000 taxpayers, it lacks information on the accuracy of that assistance. For volunteer sites, as of March 2, for a small non-statistical sample, IRS reported a 69 percent accuracy rate for return preparation, compared to its goal of 55 percent. Independent from IRS, but using similar methods, TIGTA showed a 60 percent accuracy rate. TETR is the only one of the three tax changes that created new compliance concerns for IRS (filers could request greater TETR amounts than they are entitled to). The split refund option does not create compliance concerns for IRS since it relates to the accounts into which taxpayers want their refunds deposited rather than to complying with tax provisions. Since the provisions extending the tax laws already existed, IRS anticipates that any compliance concerns for 2006 returns will be the same as for previous years'. IRS developed a plan before the filing season began, to audit suspected TETR overclaims before issuing refunds. IRS's plan for TETR was consistent with good management practices identified in previous GAO reports. IRS's plan included appointing an executive, developing an implementation plan for TETR that included standard amounts that individuals could request, developing a compliance plan to select TETR requests for audit, and monitoring and evaluating compliance by using real-time data to adjust TETR compliance efforts. For example, each week, IRS reviews the requests for TETR and selects some for audit and revises the criteria for audit selection as necessary. As of March 24, about 211,000 individuals had requested the actual amount of telephone excise tax paid for a total of $98.8 million. IRS selected about 5 percent of these requests for audit, involving about $29 million. IRS has closed four of the individual audits with the taxpayer agreeing to accept the standard amount, and has not completed the remaining individual audits or any of the business audits. About 189,000 businesses had requested TETR for a total of about $74.7 million. IRS selected about 560 for audit, involving about $5.6 million. IRS reassigned about 77 full-time equivalent staff from discretionary audits and earned income tax credit audits to conduct TETR audits. Additionally, Criminal Investigation has spent 13 full-time equivalent staff on TETR activities in 2007. Many taxpayers choose to pay others to prepare their tax returns rather than prepare their own returns. Sixty-two percent of all the individual tax returns filed for the 2006 filing season used a paid preparer. In most states, anyone can be a paid preparer regardless of education, training, or licensure. However, there are different types of preparers. Paid preparers who hold professional certificates include CPAs and attorneys. Other preparers vary in their backgrounds. Some have extensive training and experience and others do not. In 2003 we reported to this Committee that while many taxpayers who used paid preparers believed they benefited from doing so, some were poorly served. Last year we reported to this Committee on errors made by commercial chain preparers, including the results of undercover visits to 19 locations. In our visits to 19 outlets of several commercial chain preparers, we found that paid preparers made mistakes in every one of our visits, with tax consequences that were sometimes significant. The errors resulted in unwarranted extra refunds of up to almost $2,000 in five instances, while in two cases they cost the taxpayer over $1,500. Some of the most serious problems involved preparers not reporting business income in 10 of 19 cases; not asking about where a child lived or ignoring our answer to the question and, therefore, claiming an ineligible child for the earned income tax credit in 5 out of the 10 applicable cases; failing to take the most advantageous postsecondary education tax benefit in 3 out of the 9 applicable cases; and failing to itemize deductions at all or failing to claim all available deductions in 7 out of the 9 applicable cases. At the time, IRS officials responded that, had our undercover investigators been real taxpayers filing tax returns, many of the preparers would have been subject to penalties for such things as negligence and willful or reckless disregard of tax rules and some may have risen to the level of criminal prosecution for willful preparation of a false or fraudulent return. The taxpayers in these cases would also have been potentially exposed to IRS enforcement action. The limited data did not permit observations about the quality of the work of paid tax preparers in general. Undoubtedly, many paid preparers do their best to provide their clients with tax returns that are both fully compliant with the tax law and cause them to neither overpay nor underpay their federal income taxes. IRS and the paid preparer community have taken some actions as a result of our work. After we provided the results of our 19 visits to IRS, IRS determined that 4 of these cases warranted a Program Action Case. In a Program Action Case, IRS selects 30 tax returns from a preparer and audits them to look for a pattern of compliance problems. IRS officials told us that these audits would begin in April 2007. Other cases were referred to the office responsible for monitoring earned income tax credit compliance, and we have been told that 10 preparers that we visited will receive visits to check for compliance with the due diligence requirements of that program. IRS also referred the cases to the office that monitors electronic filing compliance. We also presented our findings at all six of its nationwide tax forums last year, large educational conferences for the paid preparer community. In addition, we have been told that some tax preparation chains and preparer organizations have incorporated the results of our work into their educational materials. Finally, we recommended that IRS conduct research to determine the extent to which paid preparers live up to their responsibilities to file accurate and complete tax returns based on information they obtain from their customers. IRS officials have described plans to develop data to use to research paid preparer compliance issues, including whether tax preparers who are noncompliant themselves are more likely to prepare client returns that are noncompliant. To date, this research has not been completed. While this may be useful research, we do not believe such research would determine the extent to which paid preparers live up to their responsibilities. Recent suits filed by the Justice Department highlight the obligations of paid preparers. The Justice Department filed suits to stop fraudulent return preparation at more than 125 outlets in four states of one preparation chain for allegedly taking part in preparation scams that led to fraudulent returns. Because they help the majority of taxpayers prepare their returns, paid preparers are a critical quality control checkpoint for the tax system. Due diligence by paid preparers has potential to prevent non-compliance and reduce IRS's cost and intrusiveness. BSM is critical to supporting IRS's taxpayer service and enforcement goals and reducing the tax gap. For example, BSM includes projects to allow taxpayers to file and retrieve information electronically and to provide technology solutions to help reduce the backlog of collections cases. Despite progress made in implementing BSM projects and improving modernization management controls and capabilities, significant challenges and serious risks remain, and further program improvements are needed, which IRS is working to address. Over the past year, IRS has made further progress in implementing BSM projects and in meeting cost and schedule commitments, but two key projects experienced significant cost overruns during 2006--CADE and Modernized e-File. During 2006 and the beginning of 2007, IRS deployed additional releases of the following modernized systems that have delivered benefits to taxpayers and the agency: CADE, Modernized e-File, and Filing and Payment Compliance (a tax collection case analysis support system). Each of the five associated project segments that were delivered during 2006 were completed on time or within the targeted 10 percent schedule variance threshold, and two of them were also completed within the targeted 10 percent variance threshold for cost. However, one segment of the Modernized e-File project as well as a segment of the CADE project experienced cost increases of 36 percent and 15 percent, respectively. According to IRS, the cost overrun for Modernized e-File was due in part to upgrading infrastructure to support the electronic filing mandate for large corporations and tax-exempt organizations, which was not in the original projections or scope. IRS has also made significant progress in implementing our prior recommendations and improving its modernization management controls and capabilities, including efforts to institutionalize configuration management procedures and develop an updated modernization vision and strategy and associated 5-year plan to guide information technology investment decisions during fiscal years 2007 through 2011. However, critical controls and capabilities related to requirements development and management and post implementation reviews of deployed BSM projects have not yet been fully implemented. In addition, more work remains to be done by the agency to fully address our prior recommendation of developing a long-term vision and strategy for completing the BSM program, including establishing time frames for consolidating and retiring legacy systems. IRS recognizes this and intends to conduct further analyses and update its vision and strategy to address the full scope of tax administration functions and provide additional details and refinements on the agency's plans for legacy system dispositions. Future BSM project releases continue to face significant risks and issues, which IRS is taking steps to address. IRS has reported that significant challenges and risks confront its future planned system deliveries. For example, delays in deploying the latest release of CADE to support the current filing season have resulted in continued contention for key resources and will likely impact the design and development of the next two important releases, which are planned to be deployed later this year. The potential for schedule delays, coupled with the reported resource constraints and the expanding complexity of the CADE project, increase the risk of scope problems and the deferral of planned functionality to later releases. Maintaining alignment between the planned releases of CADE and the new Accounts Management Services project is also a key area of concern because of the functional interdependencies. The agency recognizes the potential impact of these project risks and issues on its ability to deliver planned functionality within cost and schedule estimates and, to its credit, has developed mitigation strategies to address them. We will, however, continue to monitor the various risks IRS identifies and the agency's strategies to address them and will report any concerns. IRS has also made further progress in addressing high-priority BSM program improvement initiatives during the past year, including efforts related to institutionalizing the Modernization Vision and Strategy approach and integrating it with IRS's capital planning and investment control process, hiring and training 25 entry-level programmers to support development of CADE, developing an electronic filing strategy through 2010, establishing requirements development/management processes and guidance (in response to our prior recommendation), and defining governance structures and processes across all projects. IRS's high- priority improvement initiatives continue to be an effective means of assessing, prioritizing, and incrementally addressing BSM issues and challenges. However, more work remains for the agency to fully address these issues and challenges. In addition, we recently reported that IRS could improve its reporting of progress in meeting BSM project scope (i.e., functionality) expectations by including a quantitative measure in future expenditure plans. This would help to provide Congress with more complete information on the agency's performance in implementing BSM project releases. IRS recognizes the value of having such a measure and, in response to our recommendation, is in the process of developing it. Continued compliance research is essential to IRS's ability to effectively focus its service and compliance efforts, and we have long been a supporter of such research. Well designed compliance research gives IRS and Congress an important measure of taxpayer compliance and it allows IRS to better target enforcement resources towards noncompliant taxpayers. Taxpayers benefit as well, because properly targeted audits mean fewer audits of compliant taxpayers and more confidence by all taxpayers that others are paying their fair share. IRS develops its tax gap estimates by measuring the rate of taxpayer compliance--the degree to which taxpayers complied with their tax obligations fully and on time. That rate is then used, along with other data and assumptions, to estimate the dollar amount of taxes not timely and accurately paid. For instance, IRS most recently estimated a gross tax gap of $345 billion for tax year 2001 and that underreporting of income represented over 80 percent of the gap. IRS developed these estimates using compliance data collected through its 2001 NRP study, which took several years to plan and execute. In that study, IRS reviewed the compliance of a random sample of about 46,000 individual taxpayers and used those results to estimate compliance for the population of all individual taxpayers and identify sources of noncompliance. IRS also used the 2001 NRP results to update its computer models for selecting likely noncompliant tax returns and used that model to select cases beginning with returns filed in 2006. IRS's fiscal year 2008 budget request states that this improved targeting of audits has increased dollar-per-case yield and reduced "no change" audits of compliant taxpayers. IRS now has a second NRP study underway, this one looking at 5,000 S corporation tax returns filed in 2003 and 2004. IRS's fiscal year 2008 budget request includes a proposal for a rolling NRP sample of individual taxpayers and a dedicated cadre of examiners to conduct these research audits. Using a rolling sample, IRS plans to replicate the 2001 NRP study by conducting audits of a smaller sample size. At the end of 5 years, IRS would have a comparable set of results to the 2001 study and continue to update the study annually by sampling the same number of taxpayers, dropping off the oldest year in the sample, and adding the new years' results every year. We support this approach. In previous GAO products, we have observed that doing compliance studies once every few years does not give IRS or others information about what is happening in the intervening years, and that a rolling sample should reduce costs by eliminating the need to plan entirely new studies every few years or more and train examiners to carry them out. Compliance research in this way will also give Congress, IRS, and other stakeholders more frequent and more current information about IRS's progress towards its long term compliance goals. Mr. Chairman, this concludes my prepared statement. We would be happy to respond to questions you or other members of the Committee may have at this time. For further information regarding this testimony, please contact James R. White, Director, Strategic Issues, at 202-512-9910 or [email protected] or David A. Powner, Director, Information Technology Management Issues at 202-512-9296 or [email protected]. Contacts 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 include Joanna Stamatiades, Assistant Director; Amy Dingler; Timothy D. Hopkins; Robyn Howard; Matthew Kalmuk; David L. Lewis; Frederick Lyles; Jennifer McDonald; Signora May; Veronica Mayhand; Paul B. Middleton; Sabine R. Paul; Cheryl Peterson; Neil Pinney; Shellee Soliday; and Tina L. Younger. 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. 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The Internal Revenue Service's (IRS) tax filing season performance is a key indicator of how well IRS serves taxpayers. This year's filing season was expected to be risky because of tax system changes, including the telephone excise tax refund (TETR) which can be requested by all individuals and entities that paid the excise tax. GAO was asked to describe IRS's service to taxpayers so far this filing season (including the impact of this year's tax systems changes). GAO was also asked to provide updates of previous assessments of the performance of paid tax preparers, IRS's efforts to modernize its information systems, and what IRS is doing to better measure taxpayer compliance. GAO compared IRS's filing season performance to prior years' and goals and based analyses of paid preparers, information systems, and compliance research efforts on recent reports. IRS's interim filing season performance is improved in some areas. The number of individual income tax returns processed to date is comparable to last year, and the number filed electronically is almost 6 percent greater. Taxpayers' ability to reach an IRS telephone assistor was somewhat less than last year, but the accuracy of answers to taxpayers' questions was about the same. Use of IRS's Web site increased, important because it is available 24 hours a day and is less costly than some other types of assistance. However, there have been challenges. Taxpayers' use of the Free File program, which provides free tax preparation and electronic filing through IRS's Web site--is 5.2 percent below last year at this time. Also, the Customer Account Data Engine (CADE), a modern tax return processing system, became operational 2 months behind schedule. IRS still expects to post 17 -19 million taxpayer accounts to CADE, which is about two and a half times more than last year. Tax systems changes have not had a significant effect on filing season performance. For example, IRS has received a fraction of the TETR-related telephone calls it expected to date. Because paid preparers prepared over 62 percent of all individual income tax returns last year, they are a critical quality control for tax administration by helping to prevent noncompliance. Last year, GAO reported to this Committee about errors made by paid preparers. Some of the most serious errors involved not reporting business income and failing to itemize deductions. GAO's limited work last year did not permit observations about the quality of the work of paid tax preparers in general and undoubtedly, many preparers do their best to prepare tax returns that are compliant with tax laws. In response to GAO's report, IRS has scheduled compliance reviews of some preparers. In addition, recent Justice Department suits to stop fraudulent return preparation at more than 125 outlets of one preparation chain for allegedly taking part in tax preparation scams highlight the importance and obligations of paid preparers. Despite progress made in implementing Business Systems Modernization projects, including CADE, and improving modernization management controls and capabilities, significant challenges and serious risks remain. Delays in the latest release of CADE resulted in continued contention for key resources and will likely impact future releases. Also, IRS has more to do to fully address GAO's prior recommendations such as developing a long-term strategy that would include timeframes for retiring legacy computer systems. GAO has long supported IRS's research to better understand taxpayers' compliance. IRS's fiscal year 2008 budget request includes a proposal for annual research instead of larger but intermittent efforts. GAO considers this to be a good approach because it will allow compliance data to be continually refreshed and should reduce costs by eliminating the need to plan new studies every few years.

Although it is still a small part of the U.S. economy, electronic commerce is growing rapidly. For example, according to the U.S. Census Bureau, retail electronic commerce dollar volume, though less than 1 percent of overall U.S. retail sales, increased in all but two of the last six quarters.Moreover, while precisely predicting future electronic commerce volume is difficult, in June 2000 we reported that business-to-consumer Internet sales were estimated to increase to between $78 billion and $143 billion in 2003, and that business-to-business Internet sales were estimated to increase to between about $1.5 and $2.2 trillion in that same timeframe.According to GartnerGroup, a private research firm, through 2006 the pace of innovation will increase as enterprises institutionalize electronic business, and small businesses "must embrace this transition or risk their long-term viability and survival." The federal government is taking steps to increase its use of electronic commerce, particularly in the area of conducting procurements on-line. For example, the President has designated expanding the application of on-line procurement a major reform for fiscal year 2002. Further, according to a recent Congressional Research Service report, agency Web sites provided various information on federal procurement, including bid opportunities. Moreover, procurement opportunities for small businesses and for women- and minority-owned businesses were also often identified on these Web sites. Among the major federal agencies maintaining procurement Web sites are DLA, GSA, and the National Aeronautics and Space Administration. One type of on-line procurement program is a multivendor Internet-based purchasing site, sometimes called an "electronic mall." An example of an electronic mall is GSA Advantage!, in which government buyers can search listings, compare prices, and purchase items on-line much as a private individual might purchase an item from an on-line retailer. As of July 1, all vendors on the GSA schedule were required to electronically submit product descriptions and price information to GSA Advantage!. Another electronic mall is DLA's Defense Medical Logistics Standard Support (DMLSS) E-CAT program, which operates in a similar manner to GSA Advantage!, except that vendors must have an indefinite delivery/indefinite quantity contract with DLA to participate. A different type of on-line procurement program model is GSA's Information Technology Solutions Shop (ITSS) program, which is used for larger or more complex purchases. The ITSS on-line purchasing program maintains an inventory of contractors through which federal buyers can get quotations in response to requirements documents. Table 1 summarizes how each of these on-line programs works and the products that can be obtained using them. These three on-line procurement programs are small but growing in comparison to overall federal procurement dollars. According to the Federal Procurement Data System (FPDS), the government procured about $232 billion and $209 billion in goods and services in fiscal years 2000 and 1999, respectively. The three on-line programs in our review grew as a percentage of total federal procurement dollars from about 0.5 percent in fiscal year 1999 to about 1 percent in fiscal year 2000. Table 2 shows actual and estimated dollar volumes for the three programs and their growth over three fiscal years. Other on-line procurement Web sites also support government purchasing. These sites include the Department of Defense's (DOD) EMALL program, which is planned as the single DOD electronic mall, and the National Institutes of Health Intramall program. The private sector also offers on- line procurement Web sites that support government buying activities. Beyond its on-line procurement programs, the federal government also supports electronic commerce by sponsoring programs that provide electronic commerce education to businesses. For example, each of the four federally funded business assistance programs that you asked us to review provides electronic commerce education as part of its operations. Each program also uses nonfederal organizations such as nonprofit organizations or contractors to perform its education services. However, as shown in table 3, the programs differ in focus and the target clients served. The small business share of federal procurement dollars awarded through three on-line procurement sites was higher than the governmentwide small business share, as reported by FPDS, the central repository of governmentwide procurement data. However, obstacles to conducting electronic business with the federal government continue to be cited by organizations representing or working with small businesses and business assistance program officials. Some of these obstacles relate to the general readiness of small businesses to conduct electronic commerce while others are specific to how the government has implemented electronic procurement activities. The government has taken, or plans to take, actions that are expected to address some of the government-specific obstacles. As figures 1 and 2 illustrate, the share of procurement dollars awarded to small businesses through the three on-line programs in fiscal years 2000 and 1999, respectively, was greater than their governmentwide share, as reported by FPDS. These on-line procurement programs also exceeded the governmentwide goal of a 23-percent share for small businesses. Most of the contract awards made through DMLSS E-CAT and GSA Advantage! were small, which may at least partially account for the relatively large share of dollars awarded to small businesses in these programs. Small businesses generally obtain a greater percentage of contract awards of $25,000 or less (e.g., 43 percent for non-credit-card awards in fiscal year 2000), and, in fiscal year 2000, 91 percent of DMLSS E-CAT awards and 93 percent of GSA Advantage! awards were $25,000 or less. (Only 3 percent of ITSS awards were $25,000 or less.) Although small businesses received a higher share of awards in the three on-line procurement programs than the governmentwide share, some small businesses still face reported obstacles to successfully participating in on-line government purchasing activities. Obstacles reported generally fall into two categories: (1) those relating to general readiness--the willingness and ability of small businesses to conduct business electronically and (2) those specific to conducting procurements electronically with the federal government. Table 4 lists the reported obstacles by category. While these obstacles were reported in the context of small businesses, some--such as security and privacy--also apply to all businesses. As the relatively large small-business share of awards made through the three federal on-line procurement programs shows, some small businesses are overcoming these reported obstacles. Still, as the federal government continues to implement electronic procurement initiatives, it is essential that it consider the obstacles that some small businesses face and work to implement solutions that address these obstacles. Small businesses, in turn, must act to develop, maintain, operate, and evolve effective Web- based approaches to improve the likelihood of their successfully conducting business with the government. Appendix II provides additional information on these reported obstacles and various government actions being taken to address some of them. An example of such an action is GSA's Federal Business Opportunities (FedBizOpps) Web site, which has been designated the single governmentwide point of electronic entry on the Internet where vendors can access all the information they need to bid on available government business opportunities greater than $25,000. Each of the four federally funded business assistance programs in our review provided electronic commerce education as part of its operations, although the level of involvement varied. Three of these business assistance programs are oriented toward management issues and addressed electronic commerce as only one part of their responsibilities.In contrast, the fourth program, ECRC, focused entirely on electronic commerce. The ECRC program was terminated September 30, 2001. While coordination at the headquarters level for these programs was limited, the local offices generally coordinated their various electronic commerce activities. Although officials from the three management-oriented programs stated that they expect local offices to address electronic commerce issues, the standard agreements for these three programs do not require local entities to report performance metrics associated with electronic commerce. Accordingly, nationwide statistics on the electronic commerce education activities for the three management programs are not available. As a result, we contacted six local offices for each of these programs to determine whether they provided electronic commerce education. All but one of the local offices we contacted indicated that they offered electronic commerce education or assistance to their clients. Table 5 shows the types of electronic commerce assistance activities provided by the six local offices in each program we contacted. For example, local offices provided formal training as well as counseling or technical assistance to individual clients. Subjects covered by the three management-oriented programs' local offices in their electronic commerce assistance activities are shown in table 6. These subjects ranged from general introductory material to technical or government-specific topics. According to local and regional office officials, offices tailor the types of topics offered to meet local and individual client needs. As for the ECRC program, each of the centers was required to make available a standard set of training courses that was centrally maintained. Standard training courses that ECRCs provided included introductory material as well as technical and DOD-specific courses. In fiscal year 2000, ECRCs reported providing 3,468 training courses with a total enrollment of 53,800 students of whom 37,968 were DOD staff and 15,832 were non-DOD staff, including business owners or employees (some of these may be multiple courses taken by the same client). Among non-DOD staff, the courses with the highest number of participants, accounting for about two- thirds of non-DOD training were Hypertext Markup Language (HTML), (2,987 non-DOD participants); Marketing on the Internet (2,907 non-DOD participants); Internet as a business platform, (1,772 non-DOD participants); Getting started with electronic commerce (1,620 non-DOD participants); Business opportunities with DOD through electronic data interchange (1,494 non-DOD participants) The six regional ECRCs we contacted also reported providing other types of electronic commerce education, such as one-on-one technical assistance, conference presentations, and on-line training in electronic commerce. The following examples illustrate how the four assistance programs helped businesses in the electronic commerce arena and also demonstrate the differences in approach between the more management-oriented SBDCs and MEPs and the more federally and technically oriented PTACs and ECRCs. An SBDC helped two high school students set up an Internet advertising business. The company is now incorporated, and the proprietors received the 2001 SBA Young Entrepreneur of the Year Award. A MEP helped a small cabinet manufacturer develop a complete marketing plan, introduced it to electronic business, and designed a company Web site. A PTAC helped clients with the on-line DOD central contractor registry and trained them on how to search FedBizOpps. An ECRC provided hands-on training on DLA bid boards and showed the client the award notification menu on one bid board that displayed a contract award to the client, issued 5 weeks earlier, of which the client had been unaware. The ECRC program was discontinued on September 30, 2001. Reaction to this decision at the local offices of the management-oriented programs was mixed--six were concerned about losing access to expertise or about not having the staff or resources to address issues handled by the ECRCs, while four did not have such concerns (most of the remaining eight offices did not express an opinion). According to DLA officials, materials for the ECRC training courses will be turned over to its PTAC program, which plans to make them available to local PTACs via downloads from a DLA Web site. Neither DLA's Electronic Business Program Office nor its PTAC program plans to keep the course materials up to date. The four business assistance programs generally coordinated their efforts through, for example, referrals and jointly delivered training; however, such coordination occurred largely at the local level. At the headquarters level, there is no ongoing process for coordinating electronic commerce activities, although discussions on specific issues have taken place. In contrast, all but one of the local offices we contacted reported that they coordinated with at least one of the other programs. Coordination at the local level is important because each program has its own specific focus and may lack expertise found in the other programs. In one example, two ECRCs reported that they trained the local staffs of two of the management-oriented programs on selected electronic commerce issues. In other cases, ECRC staff provided electronic commerce training for the clients of these business assistance programs. Finally, in one other case, the regional rural area management-oriented business assistance offices met quarterly to determine the most appropriate program to address the clients' needs. Table 7 indicates the types of coordination activities with one or more of the other programs that the local offices of each of the business assistance programs reported. While the local offices of the four programs generally coordinated their efforts, this coordination was not universal in that we found instances in which such coordination was not occurring. For example, in five cases, the local or regional official we spoke with was not familiar with one or more of the other business assistance programs. As the federal government's electronic procurement presence grows, the participation of small businesses in this activity is critical if the government is to meet its small business procurement goals. Small businesses successfully obtained a relatively large share of federal procurement dollars in three specific on-line procurement programs, compared to the governmentwide share of federal procurements that were awarded to small businesses. At the same time, concerns about obstacles to small business participation in electronic procurements are still expressed in studies and surveys and by organizations representing and working with small businesses. These entities report that small businesses continue to face obstacles in conducting electronic procurements with the federal government, including a lack of (1) technical expertise and (2) knowledge about the government's electronic procurement strategy. Key to the success of small businesses' participation in government electronic procurements is that both parties--the government and the businesses themselves--continue to work on overcoming these and any future obstacles that may arise. The government has taken, or plans to take, actions that are expected to address some of these obstacles. In the larger electronic commerce arena, federally funded programs are providing assistance to businesses in a variety of ways. For four specific programs, this assistance included not only helping businesses with federal electronic procurements but also providing assistance in performing electronic commerce in the economy at large. The four business assistance programs in our review also were coordinating their activities at the local level. In oral comments on a draft of this report, officials representing GSA and the Office of Management and Budget's Office of Federal Procurement Policy stated that they generally agreed with our report. In written comments, DLA and SBA also stated that they generally agreed with our report. DLA submitted technical corrections, which have been included in the report. In written comments, the Department of Commerce provided updated online sales statistics and stated that they believed the services provided by the Electronic Commerce Resource Centers should be continued. SBA also included information on their electronic government vision. The written comments we received from DLA, SBA, and Commerce are reprinted in appendixes III and IV, respectively. As agreed with your office, unless you publicly announce its contents earlier, we plan no further distribution of this report for 30 days. At that point, copies of this report will be sent to the Chairman, Senate Committee on Small Business and Entrepreneurship; Chairman and Ranking Minority Member, Senate Committee on Governmental Affairs; Chairman and Ranking Minority Member, House Committee on Small Business; Chairman and Ranking Minority Member, House Committee on Government Reform; Chairman, House Subcommittee on Technology and Procurement Policy, Committee on Government Reform; and other interested congressional committees. We are also sending copies to the Secretaries of Defense and Commerce, the Administrators of the General Services Administration and the Small Business Administration, and the Director of the Office of Management and Budget and other interested parties. We will also make copies available to others upon request. If you have any questions on matters discussed in this report, please contact David McClure at (202) 512-6257 or David Cooper at (202) 512- 4587 or by email at [email protected] and [email protected], respectively. Other contacts and key contributors to this report are listed in appendix V. To determine the small business share of procurement dollars awarded by three on-line procurement programs (GSA Advantage!, ITSS, and DMLSS E-CAT) and the small business share of all federal contract dollars awarded, we obtained fiscal year 1999 and 2000 award data for these programs and interviewed applicable GSA, DLA, and contractor officials. We calculated the percentage of small business awards to total awards for each program and compared them to the governmentwide small business share, which we calculated based on the aggregate FPDS data reported in GSA's Federal Procurement Report for fiscal years 1999 and 2000. We assessed the reliability of the GSA Advantage!, ITSS, and DMLSS E-CAT data by (1) performing electronic tests of relevant fields (for example, we tested for completeness by checking key fields for missing data and checked for accuracy and reasonableness by examining summary statistics for values that were in proper and expected ranges) and (2) requesting and reviewing, if available, related program and system design documentation, audit and system reviews, and reports. The results of our assessment showed that the DMLSS E-CAT data were reliable enough for use in this report. However, the results of our assessment of the GSA Advantage! and ITSS data were inconclusive in large part because of concerns related to limitations on available documentation and security weaknesses reported in GSA's Fiscal Year 2000 Annual Report. Nevertheless, we determined that the reliability of the data provided is adequate for the comparative purposes of this report. We will be providing additional information on the GSA Advantage! and ITSS document limitations in a separate letter. To identify what, if any, obstacles exist for small businesses in conducting electronic procurements with the federal government, we performed a literature search. We also interviewed selected SBDCs, PTACs, ECRCs, and MEPs about their clients' experiences with obstacles and officials from SBA's Office of Advocacy and Office of Government Contracting. In addition, we obtained comments from organizations representing or working with small businesses to obtain their members' views on obstacles. The following are the organizations that provided information on small business obstacles: Association of Government Marketing Assistance Specialists Coalition for Government Procurement Contract Services Association of America National Black Chamber of Commerce National Small Business United U.S. Pan Asian American Chamber of Commerce Small Business Legislative Council U.S. Hispanic Chamber of Commerce We contacted 13 other organizations, such as the U.S. Chamber of Commerce and the National Women's Business Council, but they did not provide us with any information on obstacles small businesses had in performing electronic procurements with the federal government. In addition, to review what steps four federal business assistance programs have taken to educate businesses on electronic commerce and the extent to which they have coordinated their efforts, we interviewed headquarters staff of the programs and reviewed applicable program documents, such as grant and cooperative agreements and contracts. We also interviewed officials from 24 local and regional offices of these programs and obtained and reviewed available documentation from these offices. We judgmentally selected six offices from each program based on the following: For each program, we chose at least one office from each of the four U.S. census regions. Overall, we chose at least two local offices from each census Division. The census divides the United States into four regions and nine divisions--Northeast region (New England and Middle Atlantic divisions), Midwest region (West North Central and East North Central divisions), South region (West South Central, East South Central, and South Atlantic divisions), and the West region (Pacific and Mountain divisions). For each program except ECRCs, we chose at least two offices serving less populous areas, based on the Office of Management and Budget's classification of a metropolitan area. Based on the above criteria, we interviewed officials from the following offices: ECRCs Bremerton, WA Cleveland, OH Dallas, TX Fairfax, VA Scranton, PA MEPs Arkansas Manufacturing Extension Network California Manufacturing Technology Center Idaho Techhelp Iowa MEP Maine MEP Maryland Technology Center PTACs Alabama Small Business Development Consortium California Central Valley Contract Procurement Center Minnesota Project Innovation National Center for American Indian Enterprise Development New Hampshire Office of Business & Industrial Development George Mason University Procurement Technical Assistance Program SBDCs Bronx SBDC of Lehman College Danville Area SBDC (Illinois) Joplin SBDC (Missouri) Northern Virginia SBDC Western Kentucky University SBDC Wyoming SBDC, Region 2 We performed our work at SBA headquarters in Washington, DC, GSA offices in Crystal City, VA, and Washington, DC; DLA headquarters at Fort Belvoir in VA; Defense Supply Center, Philadelphia; NIST in Gaithersburg, MD; and the offices of business assistance providers and business organizations in Maryland, Virginia, and Washington, DC. We conducted our review between January and August 2001 in accordance with generally accepted government auditing standards. Obstacles reported by various studies and surveys as well as from comments provided by officials in selected federal business assistance programs and organizations representing or working with small businesses generally fall into two categories: (1) those related to general readiness--the willingness and ability of small businesses to conduct business electronically and (2) those specific to conducting procurements electronically with the federal government. Commonly cited obstacles for small businesses in this category include the following. Need to Make a Business Case. Our literature search and discussions with industry groups and business assistance program officials indicated that some small businesses may have difficulty in making a business case for adopting electronic commerce because of their inability to ascertain costs, benefits, and risks. They may have little working knowledge of the Internet and other electronic commerce technologies and insufficient information about the benefits and applicable implementation strategies appropriate for their business models. As a result, such businesses may be reluctant to make the investment to implement electronic commerce. For example, an August 2000 survey of 50 Idaho manufacturers' use of Internet technologies showed that of the 23 respondents with Web sites, 74 percent were not engaged in electronic commerce. The primary reasons companies with Web sites cited for not moving to electronic commerce were a lack of knowledge and a concern that implementation was too time-consuming and costly. One researcher concluded that for small businesses, adopting electronic commerce requires low, predictable cost; minimal changes in employee behavior; and compelling benefits over alternatives. Limited Technical Expertise. A June 2000 Organization for Economic Co- operation and Development report on enhancing the competitiveness of small and medium-sized enterprises noted that many small businesses do not know how to profitably develop their electronic commerce capabilities or how to cope with the "complex rules" governing this area. This report and other studies point out that the lack of appropriate human resources, in terms of technical and/or managerial staff familiar with the information technology environment, constitutes a major barrier for small businesses wanting to adopt electronic commerce technologies and strategies.Business assistance program officials also noted that their small business clients lack the skill sets necessary to participate in electronic commerce. They stated that small businesses need help with building Web sites, selecting Web site designers and Internet service providers, and integrating electronic commerce into their business processes. However, small businesses may not have such experience and expertise on staff and may not be able to afford to recruit and retain technical staff with these skills. Internet Access Issues. PTAC, MEP, ECRC, and SBDC business assistance program officials reported that small businesses, particularly in rural areas and on Indian reservations, have difficulty obtaining affordable high-speed Internet access sufficient for electronic commerce activities. For example, a PTAC official in a rural state said that many individuals and companies in his state have only dial-up modem service. Moreover, according to an official working on programs to assist American Indian enterprise development, reservations often lack Internet infrastructure. She estimated that only 40 percent of her clients on reservations have e-mail service. The continuing expansion of electronic commerce requires widespread high-speed Internet access. However, as we noted in February 2001, there is less availability of broadband high-speed, high-capacity connection to the Internet in the rural areas of America. Similar to other studies, our survey found the availability of broadband technology to be most prevalent in large metropolitan areas. Concerns About Security and/or Privacy. Ensuring the security of payments and proprietary information and privacy of personal data are a top priority for small businesses considering electronic commerce as a means to sell their products and services. According to the U.S. presentation before the Free Trade Area of the Americas electronic commerce committee, because of their small size and limited financial resources, small businesses may not be prepared to take on the kinds of security and privacy risks that larger companies can more easily face.Security and privacy concerns of small businesses include inappropriate disclosure of proprietary business information that governments collect from companies, consumer fraud, and the adequacy of security over a transaction on the Internet. For example, some small businesses fear bidding on-line because they do not believe that it is secure. They want assurances that their pricing and other proprietary information would be accessed only by intended recipients and not by competitors. These concerns are not unjustified. For example, we have designated information security a governmentwide high-risk area since 1997. Our latest high-risk report noted that progress in strengthening federal information security has been mixed. Commonly cited obstacles in this category include the following. Monitoring Various Federal Procurement Information Web Sites for Business Opportunities. The federal government has multiple Web sites that list contracting opportunities and related procurement information that businesses need for deciding whether to pursue a business opportunity. For example, an August 2001 search for federal "contracting opportunities" on www.firstgov.gov--the federal government's portal for accessing government on-line information--provided links to over 1,000 Web sites listing procurement opportunities and related information. Among the first 10 "hits" were links to sites with information on contracting opportunities for the Departments of Housing and Urban Development, State, and Transportation, the Army Corps of Engineers, and GSA. Organizations representing or working with small businesses point out that small companies with limited resources and staff cannot afford to spend several hours a day "surfing the Net" for potential work. To help address this issue, a May 2001 Federal Acquisition Regulation change designates the FedBizOpps Web site as the single governmentwide point of electronic entry on the Internet where vendors can access all the information they need to bid on available government business opportunities greater than $25,000. After subscribing, vendors can receive various announcements automatically via email, including solicitations and post-award notices. Agencies must provide access to all applicable actions by October 1, 2001. Because the requirement to use FedBizOpps is new, its impact on simplifying access to the government's procurements is not yet known. Moreover, information about contracting opportunities expected to be $25,000 or less does not have to be posted on FedBizOpps. As noted earlier, small businesses generally obtain a significantly higher share of these contract opportunities. Differing Requirements for On-line Purchasing Programs. The federal government has multiple on-line purchasing programs that federal buyers can access to search vendor catalogs and purchase goods and services from suppliers with government contracts. According to three business assistance program officials, the process for posting listings on these sites is inconsistent and time-consuming because vendors may have to upload their electronic catalogs to multiple sites, involving different formats and procedures. For example, the GSA Advantage! and DMLSS E-CAT programs have different requirements for formatting catalog data. An industry group representing companies that conduct business with the federal government told us that small businesses often must hire third- party service providers because they lack the ability to manage multiple electronic catalog formats, revisions, and uploads. Moreover, according to one research report, some commodity suppliers may perceive an on-line catalog to be impractical, due to the sheer number of their products and the complexity of their pricing. As of mid-August, GSA Advantage!, DMLSS E-CAT, and others were in the initial stages of considering implementing a single catalog process for medical materiel. Lack of a Single Vendor Registration System. Vendors who want to conduct business with more than one government office generally must complete multiple registrations and profiles, providing redundant business information to each site in different formats. Officials from several business assistance programs and organizations representing small businesses spoke of the need for the government to set up a single point of vendor registration. Many reiterated the point made in a 1994 government report on electronic commerce that it is much easier for a business to maintain its single repository of registration information than to submit the same information or some variation of it many times to numerous contracting activities. Moreover, the Federal Acquisition Streamlining Act of 1994 required the establishment of a "single face to industry" for conducting procurements. To help address concerns about multiple vendor registrations, DOD developed a centralized, electronic registration process--the Central Contractor Registration (CCR) system--as the single registration point for vendors that want to conduct business with DOD. As part of its efforts to expand electronic government, the Administration has tasked agencies in fiscal year 2003 to use the CCR as the single validated source of data on vendors interested in contracting with the government. According to an OMB official, the governmentwide single point of vendor registration should help to standardize the registration process, eliminate redundancies, and provide a common method of gathering and reporting vendor information. Even if a single governmentwide registration system is implemented, small businesses may still wish to register on SBA's Procurement Marketing and Access Network (PRO-Net), that is an Internet-based database of information on thousands of small businesses which federal buyers can use to search for small businesses fitting specific profiles. According to a DLA official, SBA's PRO-Net was provided access to CCR small business vendor information data on August 24, 2001. SBA officials told us that they did not yet know how they were going to use the CCR data but that vendors cannot be automatically registered in PRO-Net without their consent. Accordingly, small businesses wanting to register in both CCR and PRO-Net will have to reenter some of the same information in both systems. Problems Related to Technical Data and Drawings. Posting technical data and drawings (required by businesses preparing bids) on the Web or otherwise making them available electronically is beneficial because vendors do not have to visit contracting offices to obtain copies or have technical data packages mailed to them. However, business assistance program officials and industry groups voiced concerns about the difficulties, frustration, and time involved in locating, transmitting, downloading, and printing on-line specifications and drawings. Some of the problems reported included incomplete and inadequate technical data packages for manufactured items, on-line manuals that are difficult to decipher and use, out-of-date drawings, or the lack of availability of CD- ROMs containing drawings that are too large to download. A representative from one trade organization noted that there can be technical problems with downloading specifications in that often a fast Internet connection and powerful computer system are needed, and the software versions required by different agencies may differ or conflict with one another. ECRC and PTAC officials said that many agencies fail to recognize that small businesses have limited electronic resources and need more simplification and software standardization for on-line solicitation materials to be readily accessible. In a mid-August meeting, DLA officials agreed that the quality of electronic technical data and drawings and the delivery of this information were problems. Difficulty in Obtaining Help With Problems and Marketing Assistance. Another obstacle for many small businesses attempting to participate in on-line government purchasing programs is not knowing where to go for help or not having knowledgeable contacts. According to officials of several business assistance programs and trade association representatives, small businesses often have difficulty reaching someone at the buyer's or program office who is able and willing to help, particularly with technology-related problems and/or marketing questions. For example, one trade organization representative said that small businesses trying to market in an on-line environment have problems reaching federal procurement officials to discuss their products and services. When they call to arrange meetings with buyers, they may be referred instead to Web sites, which can be complex and confusing and may not contain the information they really need. In other cases, phone calls and e-mails were not returned when there was a problem. In particular, two industry groups and five business-assistance program officials mentioned difficulties in obtaining assistance to deal with problems associated with GSA Advantage!. For example, one ECRC official said that the GSA Advantage! Web site explanations are insufficient to address vendor questions and GSA technical support staff are also unable to answer questions from vendors about getting their products listed. In mid-August, GSA officials stated that improvements in GSA Advantage! vendor support and assistance were made in the spring and summer of 2001, such as increasing help-desk staffing, employing classroom training, and implementing a lab in which vendors are helped in loading their data onto the system. In earlier testimony on electronic government initiatives, we pointed out that the government's use of Internet and Web-based technologies should force organizations to reconsider their customers--specifically, how their customers need, perceive, and digest information and services in a viewable, electronic format. Moreover, the National Electronic Commerce Coordinating Council suggests that organizations implement a customer relations management structure. Uncertainty About the Government's Electronic Procurement Strategy. Industry groups and business assistance program officials told us that since government agencies are pursuing different approaches to implementing electronic purchasing, small businesses hesitate to invest in any one electronic commerce system. According to one PTAC program official, when businesses look closely at their government customers' electronic commerce capabilities, they find a "very mixed bag." In addition, officials in four of the six ECRC offices we contacted noted that the government has pursued many different electronic commerce solutions and has not adopted a uniform "single face" approach to the vendor community. ECRC officials cited the government's Federal Acquisition Computer Network--better known as FACNET--and electronic data interchange initiatives as examples of electronic commerce initiatives that were not fully implemented or were changed before investment returns were realized. For example, in our 1997 report on FACNET implementation, we discussed the limited use of FACNET by government agencies and the need for a coherent strategy and implementation approach for carrying out the agencies' acquisition requirements using various electronic commerce technologies and purchasing methods. Barbara Johnson, Rosa Johnson, Beverly Ross, Patricia Slocum, and Glenn Spiegel made key contributions to this report.

The federal government has been pursuing electronic initiatives to strengthen its buying processes, reduce costs, and create a competitive "virtual" marketplace. Small businesses, however, may have difficulty participating in federal on-line procurement programs. Furthermore, the government's business outreach and education programs related to electronic commerce may not be adequately coordinated. For the three federal on-line procurement programs GAO reviewed, the dollar share of awards to small businesses exceeded the overall small business share of total federal contract dollars awarded in fiscal years 2000 and 1999. Although small businesses successfully participated in these three programs, they still face obstacles in conducting electronic procurements with the government. The federal government is taking steps to address some of these obstacles, such as implementing a single point of entry on the Internet for vendors to access information on available government business opportunities greater than $25,000. Each of the four business assistance programs GAO examined had taken steps to educate its clients on electronic commerce as part of its operations. However, GAO could not fully determine the extent of these activities because they are conducted by hundreds of local and regional offices, and only one of the programs collected performance metrics specific to electronic commerce.

To be eligible for the Job Corps program, an individual must generally be 16 to 24 years old at the time of enrollment; be low income; and have an additional barrier to education and employment, such as being homeless, a school dropout, or in foster care. Once enrolled in the program, youth are assigned to a specific Job Corps center, usually one located nearest their home and which offers a job training program of interest. The vast majority of students live at Job Corps centers in a residential setting, while the remaining students commute daily from their homes to their respective centers. This residential structure is unique among federal youth programs and enables Job Corps to provide a comprehensive array of services, including housing, meals, clothing, academic instruction, and job training. ETA administers Job Corps' 125 centers through its national Office of Job Corps under the leadership of a national director and a field network of six regional offices located in Atlanta, Boston, Chicago, Dallas, Philadelphia, and San Francisco. Job Corps is operated primarily through contracts, which according to ETA officials, is unique among ETA's employment and training programs (other such programs are generally operated through grants to states). Among the 125 centers, 99 are operated under contracts with large and small businesses, nonprofit organizations, and Native American tribes. The remaining 26 centers (called Civilian Conservation Centers) are operated by the U.S. Department of Agriculture's (USDA) Forest Service through an interagency agreement with DOL. Job Corps center contractors and the USDA Forest Service employ center staff who provide program services to students. According to ETA officials, the primary responsibility for ensuring safety and security at Job Corps centers resides with center operators. Also, according to ETA officials, the Office of Job Corps has oversight and monitoring responsibility to ensure that contract operators are in full compliance with their contract and that both contract centers and USDA-operated Civilian Conservation Centers follow Job Corps' Policy and Requirements Handbook. In September 2015, as part of its overall effort to improve safety and security for students, ETA established the Division of Regional Operations and Program Integrity within the national Office of Job Corps. This division is responsible for coordinating regional operations and activities, including efforts to strengthen communications between the national and regional offices, strengthen quality assurance, and promote continuous improvement. The division is also responsible for reviewing the results of all risk management data, center safety and culture assessments, and responses to safety and security deficiencies at individual centers. For example, this division is to monitor the safety and security of Job Corps centers through ongoing oversight by regional offices, including daily monitoring of SIRS data. Job Corps' Policy and Requirements Handbook requires centers to report certain significant incidents to the national Office of Job Corps and to regional offices in SIRS within 6 or 24 hours of becoming aware of them, depending on the incident. Specifically, centers are required to report numerous categories of incidents, including deaths, assaults, alcohol and drug-related incidents, serious illnesses and injuries, and hospitalizations (see appendix I for definitions of these categories of incidents). Centers must report incidents involving both Job Corps students and staff, and incidents that occur onsite at centers as well as those that occur at offsite locations. Offsite incidents include those that occur while students are participating in program-related activities, such as off-center training and field trips. Offsite incidents also include those that occur while students are not participating in program-related activities, such as when they are at home during breaks. In some cases, the incident categories in SIRS are related to the specific infractions defined in the Policy and Requirements Handbook, which are classified according to their level of severity. Level I infractions are the most serious, and include such infractions as arrest for a felony or violent misdemeanor or possession of a weapon, and are required to be reported in SIRS. Level II infractions include such infractions as possession of a potentially dangerous item like a box cutter, or arrest for a non-violent misdemeanor. The majority of these infractions are required to be reported in SIRS. Minor infractions--the lowest level of infractions-- include failure to follow center rules, and are not required to be reported in SIRS. Within the Policy and Requirements Handbook, ETA establishes a Zero Tolerance Policy, which specifies actions that centers must take in response to certain incidents. ETA implemented changes to this policy effective on July 1, 2016, which impacted the categorization and number of reportable incidents. Under the prior Zero Tolerance Policy, there were fewer infractions categorized as Level I, which are the most severe and result in termination from the program. The July 2016 policy changes broadened the types of infractions categorized as Level I. For example, ETA elevated several infractions previously classified as Level II to Level I, and added several new categories of reportable incidents. According to ETA officials, they made these changes to reflect a heightened emphasis on student safety. ETA currently surveys all students enrolled in Job Corps in March and September each year to collect information on a variety of topics, including their perceptions of safety at Job Corps centers. The current student survey contains 49 questions on various aspects of the Job Corps program, including career development services, interactions between students and staff, access to alcohol and drugs, and overall satisfaction with the program. The survey includes 12 questions on students' perceptions of safety at centers. ETA has been conducting this survey since 2002, and in recent years has administered it twice a year. ETA officials told us they plan to survey students more frequently beginning in July 2017. Specifically, they plan to survey students on a monthly basis regarding their perceptions of safety, and on a quarterly basis regarding their overall satisfaction with the program. ETA uses the responses to the safety-related survey questions to calculate a center safety rating, which represents the percentage of Job Corps students who report feeling safe at each center, as well as a national safety rating, which represents the percentage of Job Corps students who report feeling safe nationwide. Our preliminary analysis of ETA's SIRS data shows that Job Corps centers reported 49,836 safety and security incidents, including those that occurred both onsite and offsite, from January 1, 2007 through June 30, 2016. During this time period, approximately 539,000 students were enrolled in the program, according to ETA officials. Three types of incidents represented 60 percent of all reported incidents: serious illnesses or injuries (28 percent), assaults (19 percent), and drug- related incidents (13 percent). The remaining 40 percent of reported incidents included theft or damage to center, staff, or student property (12 percent), breaches of security or safety (6 percent), and all other types of incidents (22 percent). During this time period, Job Corps centers reported 265 deaths, including 61 deaths that occurred onsite and 204 that occurred offsite. Most of these reported deaths were homicides (25 percent), due to medical causes (23 percent), and due to accidental causes (22 percent). In figure 1 below, 246 of these deaths are captured in the "Other" category, and 19 of these deaths are captured in the "Assault" category. Our preliminary analysis showed that from January 1, 2007 through June 30, 2016, 76 percent of the reported safety and security incidents occurred onsite at Job Corps centers, and 24 percent occurred at offsite locations (see fig.2). While most reported incidents occurred onsite, our preliminary analysis showed that the majority of reported deaths occurred offsite. During this time period, of the 265 reported deaths, 77 percent occurred offsite, and 23 percent occurred onsite. The vast majority of homicides reported during this time period occurred offsite, and very few occurred onsite. Of 65 reported homicides, 61 occurred at offsite locations and 4 occurred onsite. During this time period, the most common types of reported onsite incidents were generally different from the most common types of reported offsite incidents, although reported assaults were common in both locations. The most common types of reported onsite incidents were the same as the most common types of incidents overall: serious illnesses or injuries (33 percent), assaults (20 percent), and drug-related incidents (16 percent). Of all reported offsite incidents, the most common types were thefts or damage to center, staff, or student property (23 percent), motor vehicle accidents (15 percent), assaults (14 percent), and serious illnesses or injuries (14 percent) (see fig.3). Our preliminary analysis showed that from January 1, 2007 through June 30, 2016, most reported violent incidents--specifically assaults, homicides, and sexual assaults that occurred both onsite and offsite-- involved Job Corps students, and considerably fewer of these incidents involved program staff. During this time period, Job Corps centers reported 10,531 violent incidents, which represented 21 percent of all reported onsite and offsite incidents. Students were victims in 72 percent of these reported violent incidents, while staff were victims in 8 percent of these incidents. Similarly, students were perpetrators in 85 percent of these reported violent incidents, while staff were perpetrators in 1 percent of these incidents (see table 1). Each of these reported violent incidents involved at least one victim or perpetrator who was a Job Corps student or staff member, but some of these incidents also involved victims or perpetrators who were not associated with the Job Corps program. Our preliminary analysis of ETA's student satisfaction survey data from March 2007 to March 2017 showed that while students generally reported feeling safe at Job Corps centers, they reported feeling less safe on certain safety and security issues. Overall, across all 12 of the safety- related survey questions, an average of 72 percent of students reported feeling safe during this time period. However, the average percentage of students who reported feeling safe on each individual survey question ranged from 44 percent to 91 percent. For 7 of the 12 questions, student responses were above the 72 percent average, which indicates students felt more safe; however, for 5 of the questions, student responses were below the average, which indicates students felt less safe (see table 2). For example, an average of 44 percent of students reported that they had never heard students threaten each other, or had not heard such threats within the last month. The remaining 56 percent of students, on average, reported hearing such threats at least once in the last month. ETA uses students' responses to the safety-related survey questions to calculate a safety rating for each Job Corps center and a national safety rating for the program overall. According to ETA officials, the center safety rating represents the percentage of students who report feeling safe at a center, and the national safety rating represents the percentage of students who report feeling safe nationwide. Throughout the period of March 2007 through March 2017, the national safety rating remained above 82 percent, according to ETA data. ETA officials said they use these ratings as management tools to assess students' perceptions of safety at individual centers and nationwide, and to determine whether ETA needs to act upon these results to better address students' safety and security concerns. Chairwoman Foxx, Ranking Member Scott, and Members of the Committee, this concludes my prepared remarks. I look forward to answering any questions you may have. For further information regarding this testimony, please contact Cindy Brown Barnes at (202) 512-7215 or [email protected]. Contact points of 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 testimony include Mary Crenshaw (Assistant Director), Caitlin Croake (Analyst in Charge), David Chrisinger, Alexander Galuten, LaToya Jeanita King, Rebecca Kuhlmann Taylor, Grant Mallie, Sheila McCoy, Meredith Moore, Mimi Nguyen, Lorin Obler, Matthew Saradjian, Monica Savoy, Almeta Spencer, Amy Sweet, Walter Vance, Kathleen van Gelder, and Ashanta Williams. Appendix I. Categories of Incidents in the Significant Incident Reporting System (SIRS) ETA's Definition An incident involving the discovery of alcohol on center, or involving any student found in possession of alcohol or charged by local law enforcement agencies with illegal alcohol consumption or possession. Incidents which require medical treatment due to the physical effects of drug use (alcohol poisoning, etc.) should be reported under the "Medical Incident" Primary Incident Code. This code applies when a student is arrested for an incident that occurred prior to his/her enrollment in Job Corps. These are acts that are commonly known as assault, battery, or mugging; any assault with a weapon or object; or any altercation resulting in medical treatment for injuries. Mugging (robbery) is included in this category because it pertains more to an assault upon a person than on property. Homicide has been removed as a Primary Incident Code and is now listed under Assault as a Secondary Incident Code. This code applies to any incidents that threaten the security and safety of center students, staff, and property which may result in injury, illness, fatality, and/or property damage. Examples include arson, bomb threat, gang-related incidents, possession of gun, possession of an illegal weapon, unauthorized access to center buildings, grounds, or restricted areas, and verbal threats. Attempted suicide is a deliberate action by student to self-inflict bodily harm in an attempt to kill one's self. Centers need only report a suicide threat (suicidal ideation) if it results in evaluation by a physician or mental health consultant. Centers must report the death of any student who is enrolled in Job Corps regardless of his/her duty status. Centers are only required to report the death of a staff member if the death occurs while on duty, either on center or off center. Incidents involving any student or staff found in possession of or charged by local law enforcement agencies with a drug offense (e.g. the illegal use, possession, or distribution of a controlled substance), or the discovery of drugs on center. Incidents which require medical treatment due to the physical effects of drug use (overdose, etc.) should be reported under the "Medical Incident" Primary Incident Code. ETA's Significant Incident Reporting System (SIRS) Technical Guide does not provide a definition of this category. Sexual misconduct includes the intentional touching, mauling, or feeling of the body or private parts of any person without the consent of that person. Sexual harassment or unsolicited offensive behavior such as unwelcome sexual advances, requests for sexual favors, and other verbal or physical contact of a sexual nature is also included. ETA's Significant Incident Reporting System (SIRS) Technical Guide does not provide a definition of this category. ETA's Significant Incident Reporting System (SIRS) Technical Guide does not provide a definition of this category. ETA's Significant Incident Reporting System (SIRS) Technical Guide does not provide a definition of this category. ETA's Significant Incident Reporting System (SIRS) Technical Guide does not provide a definition of this category. ETA's Definition ETA's Significant Incident Reporting System (SIRS) Technical Guide does not provide a definition of this category. ETA's Significant Incident Reporting System (SIRS) Technical Guide does not provide a definition of this category. Motor vehicle accidents involving any Job Corps student, on duty staff member, and/or center- owned vehicle should be reported using this code. Incidents in which a pedestrian is struck by a motor vehicle should be reported under the "Medical Incident" Primary Incident Code. Safety/Hazmat are incidents involving hazardous materials/chemicals in any solid, liquid, or gas form that can cause harm to humans, plants, animals, property, or the environment. A hazardous material can be radiological, explosive, toxic, corrosive, biohazard, an oxidizer, an asphyxiant or have other characteristics that render it hazardous in specific circumstances. Hazmat/toxic-mercury, gasoline, asbestos, lead, used syringe, blood Hazmat/non-toxic-water, oxygen (can become hazardous under specific circumstances) Medical incidents include any diagnosis of injury, illness, or disease which is serious or widespread among students and/or staff, (e.g. communicable disease outbreak, reaction to medication/immunization, emergency surgery, hospitalization, emergency room treatment, etc.). Incidents which require medical treatment due to the physical effects of drug and/or alcohol use (drug overdose, alcohol poisoning, etc.) should be included in this category. Sexual assault includes any alleged non-consenting sexual act involving forceful physical contact including attempted rape, rape, sodomy, and others. If forceful physical contact is not used, the incident should be reported as a Sexual Misconduct. Property incidents are any incident by students or staff that involve the destruction, theft, or attempted theft of property; this includes but is not limited to automobile theft, burglary, vandalism, and shoplifting. If any type of force is used against another person, the incident is to be reported under the "Assault" Primary Incident Code. Property incidents also include natural occurrences/ disasters or any other incident threatening to close down the center or disrupting the center's operation (e.g. hurricane, flooding, earthquake, water main break, power failure, fire, etc.). These incident categories were added to SIRS in June 2016. Some of these new categories previously existed in SIRS, but were renamed in June 2016. Others were entirely new categories as of June 2016. Centers were not required to officially report data in these new categories until July 1, 2016. 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The deaths of two Job Corps students in 2015 raised concerns about the safety and security of students in this program. The Job Corps program serves approximately 50,000 students each year at 125 centers nationwide. Multiple DOL Office of Inspector General (OIG) audits have found deficiencies in the Office of Job Corps' efforts to oversee student safety. ETA and the Office of Job Corps have taken steps to address these concerns, but in March 2017, the DOL OIG raised new safety and security concerns, including some underreporting of incident data, and made related recommendations. This testimony is based on GAO's ongoing work on these issues and provides preliminary observations on (1) the number and types of reported safety and security incidents involving Job Corps students, and (2) student perceptions of safety at Job Corps centers. GAO analyzed ETA's reported incident data from January 1, 2007 through June 30, 2016. GAO's preliminary analysis summarizes reported incidents in the aggregate over this time period but the actual number is likely greater. GAO also analyzed student survey data from March 2007 through March 2017, reviewed relevant documentation, and interviewed ETA officials and DOL OIG officials. GAO's preliminary analysis of the Department of Labor's (DOL) Employment and Training Administration's (ETA) incident data found that Job Corps centers reported 49,836 safety and security incidents of various types that occurred both onsite and offsite between January 1, 2007 and June 30, 2016. During this time period, approximately 539,000 students were enrolled in the program, according to ETA officials. ETA's Office of Job Corps is responsible for administering the Job Corps program, which is the nation's largest residential, educational, and career and technical training program for low-income youth generally between the ages of 16 and 24. As shown in the figure, the three most common types of reported incidents were serious illnesses or injuries, assaults, and drug-related incidents. More than three-quarters of the reported incidents occurred onsite at Job Corps centers, and the rest occurred offsite. Most reported violent incidents--specifically assaults, homicides, and sexual assaults that occurred onsite and offsite--involved Job Corps students. For example, students were victims in 72 percent of these reported incidents, while staff were victims in 8 percent, and the remaining incidents involved victims who were not associated with Job Corps. GAO's preliminary analysis of ETA's student survey data from March 2007 through March 2017 found that students generally reported feeling safe, but they reported feeling less safe with respect to certain issues. The student survey contains 49 questions about students' experiences in the Job Corps program, including 12 questions related to safety at centers. Across all 12 of these safety-related survey questions, an average of 72 percent of students reported feeling safe over this 10-year period. However, the average percentage of students who reported feeling safe on each individual survey question ranged from 44 percent to 91 percent. For example, an average of 44 percent of students reported that they had never heard students threaten each other, or had not heard such threats within the last month. The remaining 56 percent of students, on average, reported hearing such threats at least once in the last month. GAO is not making recommendations in this testimony but will consider recommendations, as appropriate, when ongoing work is finished. GAO incorporated comments from ETA as appropriate.

DOE manages the largest laboratory system of its kind in the world. Since the early days of the World War II Manhattan Project, DOE's laboratories have played a major role in maintaining U.S. leadership in research and development. DOE is responsible for ensuring that the laboratory system--with 22 laboratories in 14 states, a combined budget of over $10 billion a year, and a staff of about 60,000--is managed in an effective, efficient, and economical manner. DOE contracts with educational institutions and private sector organizations for the management and operation of 18 of its laboratories. (App. I lists DOE's national laboratories.) The remaining four laboratories are staffed by federal employees. DOE pays its laboratory contractors all allowable costs. DOE can also pay contractors a separate fee, or profit, as compensation for operating the laboratories. Fees are based on the contract value and the technical complexity of the work to be performed at a laboratory, but also on the degree of financial liability or risk that a contractor is willing to assume. Under performance-based contracting principles, fees can include both a fixed amount and an amount that is linked to achieving performance objectives. One of DOE's major goals in performance-based contracting is to develop performance objectives for each contractor that are specific, results-oriented, measurable, and reflect the most critical activities. DOE's implementation of performance-based contracting for its laboratories is in a state of transition. While most of its laboratory contracts contain some performance-based features, the contracts negotiated by DOE vary from contract to contract. For example, DOE is incorporating performance-based features in all of its laboratory contracts, although measures vary substantially in number, ranging from a low of 7 in one laboratory contract to about 250 in another. Also, DOE has negotiated performance fees in only 9 of its 18 laboratory contracts because the remaining laboratories are still operating under DOE's traditional approach in which fees are not linked to performance. We found that similar laboratories managed by similar contractors have different contracts. The wide diversity of contract features reflects DOE's philosophy of relying on DOE field units to tailor contracts to local conditions and contractors' preferences. Since introducing performance-based contracting in 1994, DOE and its laboratory contractors have struggled to find the right mix of measures that accurately and reliably capture the contractors' performance. According to DOE field staff, in the early years of contract reform, DOE encouraged its field units to construct as many measures as they could, but provided limited guidance on how to accomplish this task. As a result, early attempts led to large numbers of performance measures. A large number of measures diminishes the importance of any single measure, whereas a small number results in measures that are too broad to be meaningful. For example, a DOE field official told us, "The original guidance from DOE Headquarters was to [develop performance measures] as much as possible. Unfortunately, there was inadequate guidance on how to do this. . . . The number of performance measures . . . is too large. However, if we fail to cover an activity [with a measure] the contractor may not give the attention needed to the activity." DOE and its laboratories are still attempting to develop the right number of measures. For example, we found that the number of performance measures in the laboratory contracts we examined ranged from a low of 7 measures at the Ames Laboratory in Iowa to about 250 at the Idaho National Engineering and Environmental Laboratory in Idaho. DOE and its contractors are also working to develop measures that reliably address the most important activities of the laboratories. According to a field official, DOE's early attempts at developing performance measures resulted in contractors focusing only on those activities that were tied to performance fees, while neglecting other important activities. Another DOE site official stated, "erformance-based contracting tends to focus too much on the monetary reward . . . and less on an analysis of performance. The incentive at the labs should be good science, not more dollars." Developing the right number and type of performance measures is an evolving process between DOE and its contractors. Most DOE and contractor representatives told us that they are making progress in finding measures that accurately and reliably reflect performance, particularly in management and operations activities. Measuring a contractor's performance in science and technology is more difficult. Science and technology measures are broader in scope and typically rely on peer reviews and a contractor's self-assessment for evaluating performance. Although performance fees are a major feature of performance-based contracting, only 9 of the Department's 18 laboratory contracts have them. Nine of the remaining laboratory contracts operate under DOE's traditional fixed-fee arrangement, and one laboratory contract has no fee. Fixed fees are earned regardless of performance and were commonly used before DOE adopted performance-based contracting as its normal business practice. Appendixes I and II summarize laboratory fee arrangements and illustrate the wide variety of fee arrangements in use. In commenting on a draft of this report, DOE said that by the end of calendar year 1999, the majority of laboratory contracts that provide fees will have performance-based fee structures. Performance fees were introduced as a way of encouraging superior performance and can include an incentive and an award fee. An incentive fee is usually applied to activities for which progress can be accurately measured, for example, cleaning up 40 barrels of toxic waste within a prescribed period of time. An award fee is usually applied to tasks that are harder to measure and require a more subjective judgment of performance, for example, assessing a contractor's attention to community relations. Performance fees represent the amount of a contractor's total fee placed "at risk" since the fee that could be earned is determined by how well the contractor performs. As the following examples show, some laboratory contracts include both types of performance fees, while others rely solely on an incentive fee or an award fee. Still others have neither and use only fixed fees. At the Sandia National Laboratories in New Mexico and the Oak Ridge National Laboratory in Tennessee, DOE negotiated fixed-fee contracts. Both of these laboratories are operated by subsidiaries of the Lockheed Martin Corporation--a for-profit company. DOE officials told us they were confident that incentive fees were not needed for these laboratories because the existing Lockheed Martin contractors' performance is superior and introducing incentive fees might distract the contractors from performing all essential work. At the Idaho National Engineering and Environmental Laboratory in Idaho, operated by Lockheed Martin Idaho Technologies Company, DOE uses a combination of fixed, incentive, and award fees. DOE officials told us that incentive fees were used because of the many different tasks that could be identified and measured, but that award fees were also needed to assess activities that required more subjective judgments. At the Stanford Linear Accelerator Center in California, operated by Stanford University, DOE negotiated a no-fee contract, the only such arrangement in the laboratory system. According to DOE, the laboratory contractor does not want a fee for operating this laboratory because a fee would not motivate performance and may be a detriment to the conduct of outstanding science, which is the primary mission of this laboratory. The Lawrence Berkeley National Laboratory and Lawrence Livermore National Laboratory in California and the Los Alamos National Laboratory in New Mexico are operated by the University of California. The contracts contain a fixed fee and an incentive fee for meeting expectations, plus another amount for exceeding expectations. A senior DOE official acknowledged the variability in laboratory contracts but said that imposing uniform practices throughout the laboratory system would not necessarily improve the overall performance and accountability of the contractors. According to DOE and laboratory officials, there are several reasons for the variability in the contracts. First, the laboratories engage in different activities with different levels of technical complexities. Second, some contractors are willing to assume greater financial risk or liability and thus expect a higher or different fee arrangement. Finally, DOE field officials who negotiate the contracts employ features that they believe are best suited for their particular circumstances. However, we found that similar laboratories operated by similar contractors have different fee arrangements. For example, both the Lawrence Berkeley and Argonne national laboratories have similar research missions and are both managed by university contractors. However, Lawrence Berkeley's contractor, the University of California, works under a fixed-fee plus performance fee arrangement, while Argonne's contractor, the University of Chicago, works under a performance fee arrangement only. We also found substantial variations in contracting philosophy among DOE field officials. DOE relies on field units to negotiate its contracts, including whether to use performance-based fees, and how performance objectives and measures will be accomplished. Some of these officials told us that performance fees are important motivators, while others said performance fees can distract the contractor from other important work. In commenting on a draft of this report, DOE provided us with additional reasons for the variability in contracts, including the timing of when contractors first converted to performance-based contracting, the nature of the proposals received in competitive awards, and the negotiated terms in contract extensions. In addition, DOE cited other motivations for laboratory contractors, such as their reputations in the scientific community and contract extensions. DOE's guidance states that the purpose of performance-based contracting is to obtain better performance or lower costs or both. DOE has not analyzed the impact of performance-based contracting on its laboratory contractors. As a result, it has not determined whether performance-based contracting is achieving the intended objectives of reducing costs and improving performance. DOE officials told us that the amounts of fees paid to laboratory contractors have generally increased with the implementation of performance-based contracting but that it is difficult to determine the return on this investment since contractors are also assuming more risk or liability for costs previously paid by DOE. Increased liabilities include costs due to a failure to exercise prudent business judgment on the part of the contractor's managerial personnel. DOE has not analyzed the relative costs and benefits to the government of using higher fees in performance-based contracts. We previously recommended that DOE ensure that the fees paid to contractors for incurring increased financial risks are cost-effective by developing criteria for measuring the costs and benefits to the government of this approach. DOE officials told us that while they have not conducted a comprehensive cost-benefit analysis of fees, they try to negotiate fees that make sense for individual contracts, taking into account the financial risks and incentives needed to motivate performance. Without such an overall analysis, however, it is difficult to determine the value to the government of the over $100 million spent on contractor fees for fiscal year 1998. Although DOE has not assessed the impact of performance-based contracting, limited reviews have found both progress and problems, as these examples show: Since 1997, DOE's Office of Inspector General has issued three reports on problems the Department had in implementing performance-based incentives at three facilities (one of which was a laboratory). Problems reported by the Inspector General included contracts with poorly developed performance measures and fees that were paid to contractors before agreement was reached on the performance incentives. In 1997, DOE's Office of Procurement issued a report on the use of performance-based incentives. The report noted that the use of incentives has been effective in directing contractors' attention to performance outcomes and has improved communications concerning performance expectations. The report also noted that DOE field units are improving the quality of their contracts. However, the report pointed out that implementation was sometimes inconsistent and that performance objectives sometimes were overly focused on process milestones rather than on outcomes. DOE's laboratories were not the focus of this review, however. Our July 1998 report on DOE's performance-based incentive contracts noted that the Department had taken steps to correct many of the problems cited in the Inspector General's reports, including issuing guidance, conducting training, and incorporating lessons learned into fiscal year 1998 contract incentives. We noted that although DOE maintained that its performance-based incentives have been effective in achieving the desired end results, it had not been clear whether these successes were due to performance-based incentives or to an increased emphasis on program management. None of these assessments focused exclusively on laboratory contracts. In our discussions, DOE field staff generally credited performance-based contracting with improving their ability to set expectations for the Department's laboratories, and several laboratory contractors concurred that this was a benefit. In addition, both DOE and laboratory officials cited improved communication as a benefit of performance-based contracting. Laboratory contractors also credited DOE for focusing its oversight on evaluating results and away from dwelling on strict compliance with DOE's rules and regulations. In addition, contractors told us they have increased productivity and lowered costs, especially for the support and overhead functions. However, most of these officials also said that these advances were more the result of other initiatives, such as internal streamlining actions, than of performance-based contracting. DOE and its laboratory contractors told us that they are committed to making performance-based contracting work effectively and that the contracts are including more specific and reliable performance measures. However, since DOE has not evaluated the impact of performance-based contracting on its laboratories--owing in part to the wide variance in fee arrangements--there is limited evidence on how performance fees ensure a high level of performance by contractors at lower cost. As a result, DOE cannot show how the higher fees it is paying to contractors under performance-based contracting are of value to the government and to the taxpayers. We previously recommended that the Secretary of Energy ensure that the fees paid to contractors for incurring increased financial risk are cost-effective by developing criteria for measuring the costs and benefits to the government of this approach. DOE did not implement our recommendation and has no plans to measure the overall costs and benefits of performance-based contracting for its laboratories. DOE officials maintain that performance-based contracting is working, but this is based on anecdotal evidence. Moreover, the fees DOE negotiates are based on its best judgment of what is needed to motivate contractors and to compensate them for increased risk, but DOE's evidence is based primarily on non-laboratory contractors, and DOE has not quantified the value of the increased risk assumed by contractors under performance-based conditions. Because DOE does not know whether performance-based contracting is improving performance at lower cost at its national laboratories and because our previous recommendation to develop criteria for measuring the costs and benefits of paying fees to contractors for incurring increased financial risk was not implemented, we recommend that the Secretary of Energy evaluate the costs and benefits from using performance-based contracting at the national laboratories. While we recognize that each laboratory contract is individually negotiated, DOE should nevertheless ensure that the fees it provides to motivate contractors and to compensate them for increased financial risk is based on an analysis of costs and benefits. The need for this type of evaluation is consistent with the principles of the Government Performance and Results Act of 1993 that require agencies to measure outcomes against their goals. We provided a draft of this report to DOE for review and comment. DOE disagreed with our conclusion on the need for determining the costs and benefits of the fees it has negotiated with its laboratory contractors. DOE noted that its performance-based contracting experience is in transition but that its evaluations show that performance-based contracting is working. We acknowledge in our report that DOE's evaluations of performance-based contracting show promise, but we also point out that these evaluations did not focus on the laboratories' experiences with performance-based contracting. Because of this limitation and because of the higher fees being negotiated with the laboratories, we continue to believe it is desirable for DOE to determine if its performance-based contracting is improving performance at lower cost. DOE also commented that the variability we found in performance-based laboratory contracts reflects many different factors, including differences in the scope of work, the type of contractor, and the experiences the laboratories have with performance-based contracting features. Our report described the reasons for the variability in laboratory contracts, and we have included the additional reasons provided in DOE's comments. We also agree that DOE's use of performance-based contracting is evolving and that the variability we found in laboratory contracts (principally in performance measures and fee arrangements) is in part due to an ongoing learning process associated with the transition to performance-based contracting. DOE also raised a number of issues regarding the use of fees in its laboratory contracts and strongly defended its use of performance fees. We agree with many of DOE's observations on the use of performance fees, and we are not suggesting that DOE should abandon its performance-based approach or that it should eliminate performance-based fees in its laboratory contracts. It is also not our intent to show that performance-based contracting should be abandoned if its impacts on the laboratories cannot be measured. We do believe, however, that effective implementation of performance-based contracting provisions is dependent on the ability to support the fee amounts paid through a cost and benefit analysis. DOE also provided a number of clarifications that we have incorporated in our report as appropriate. Appendix III includes the full text of DOE's comments and our response. Our review was performed from September 1998 through April 1999 in accordance with generally accepted government auditing standards. See appendix IV for a description of our scope and methodology. As arranged 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 to Bill Richardson, Secretary of Energy, and Jacob J. Lew, Director, Office of Management and Budget. We will make copies available to others on request. If you or your staff have any questions about this report, please call me at (202) 512-3841. Major contributors to this report were Gary R. Boss and Tom Kingham. Contract amount (millions) (Table notes on next page) The contract and fee amounts shown are for the entire Savannah River Site, including the Savannah River Technology Center. Incentive-fee contract. DOE plans to extend this contract 5 years, but is renegotiating to make it consistent with the federal acquisition regulations format and to incorporate all contract reform features, including performance-based provisions. Fixed-fee contract. The new contract was signed in January 1998 with a fixed fee through September 1998. DOE is still negotiating the contract for fiscal year 1999. DOE plans to negotiate a performance fee. Incentive-fee contract. DOE plans to recompete this contract in fiscal year 1999. The current contractor, Lockheed Martin, announced it will not bid. Incentive-fee contract. The amount of the annual available fee remains the same for each year of the 5-year contract. Incentive-fee contract. The amount of the annual available fee remains the same for each year of the 5-year contract. Incentive-fee contract. The amount of the annual available fee remains the same for each year of the 5-year contract. Incentive-fee contract. DOE converted this contract from a fixed-fee to an incentive-fee type and made available $7.1 million in potential fees geared to incentives in four areas--science and technology excellence, operational excellence, leadership and management, and community relations. Sandia National Laboratories/Sandia Corp. (Lockheed Martin) Fixed-fee contract. The contract that expired in September 1998 was renegotiated and extended noncompetitively for 5 years. The new contract remains a fixed-fee arrangement but now includes performance objectives, measures, and criteria. DOE decided that the contractor's superior performance could be sustained with a fixed fee. Incentive-fee contract. DOE is renegotiating this contract and plans to extend noncompetitively for 5 years. DOE plans to make the contract consistent with the federal acquisition regulations format and to incorporate all contract reform conditions, including performance-based provisions. Fermi National Accelerator Laboratory/University Research Associates, Inc. Fixed-fee contract. DOE has not announced whether it will recompete or extend this contract. DOE rates the contractor's performance as outstanding. Award-fee contract. DOE recompeted this contract in 1998. The new contract was effective on Oct. 1, 1998, and is fixed fee until March 1999, at which time DOE intends to includes an award fee for the remainder of the contract period. Fixed-fee contract. The contractor did not want any fee, but DOE negotiated a small fee of $10,000. (continued) No-fee contract. The contract term ended on March 31, 1998, and was extended noncompetitively on a month-by-month basis during negotiations to incorporate performance-based incentives. The contract was then extended noncompetitively for 5 years in January 1999. The contract includes performance measures and expectations, but no fee. No fee contract (with management allowance). The contract is currently being renegotiated so that it can be extended noncompetitively for 5 years. DOE plans the new contract to be a fixed-fee arrangement. Objectives of the negotiations are to structure the contract to be consistent with the federal acquisition regulations format and to incorporate all contract reform conditions, including performance-based features. Fixed-fee contract. The contract was recompeted in 1998. The new contractor was selected (the Bechtel Group) but the incumbent contractor, Westinghouse Electric Corporation, protested the award. The existing contract extended non-competitively pending the result of a bid protest to GAO. The bid protest was denied by GAO. The new contract with Bechtel was effective February 1, 1999. Knolls Atomic Power Laboratory/KAPL, Inc. (Lockheed Martin) Fixed-fee contract. Savannah River Technology Center/Westinghouse Savannah River Co. Incentive-fee contract. The following are GAO's comments on the Department of Energy's letter dated April 22, 1999. 1. We have made changes to the report as appropriate in response to DOE's comments. 2. Our wording is drawn from DOE's guidance on performance-based contracting, and we have made changes to our report to reflect DOE's comments. DOE recommends that its laboratory contracts contain performance-based features, which include clear expectations described in terms of results, not how the work is to be accomplished. 3. As we stated in our report, DOE's evaluations did not focus on the laboratory contractors, nor did these evaluations focus on the costs and benefits of performance-based contracting features, including the impact of fees. 4. We recognize that one of the purposes of providing fees is to reflect the financial risk associated with work performance, and we make this point in our report. Our 1994 recommendation questioned the cost-benefit of the increased fees, regardless of whether they were related to performance or financial risk. We continue to believe that our recommendation is relevant because DOE has not evaluated the cost and benefit of the fees it is providing to laboratory contractors. 5. We believe our wording adequately reflects the conditions discussed. Information on the laboratory fees and total contract costs is presented in appendix I. 6. We have made changes to the report as appropriate in response to DOE's comments on contract type. We stated in our report that DOE's performance-based contracting is in a state of transition. We also stated that there are wide variations in performance measures and fee arrangements negotiated by DOE and its laboratory contractors. This material is presented as facts describing the conditions that presently exist. Our report also describes the reasons for the variability in laboratory contracts and includes most of the reasons given in DOE's comments. We have made changes in the report to reflect these additional reasons for the variability in DOE's laboratory contracts. 7. Our statement that contract differences are the product of DOE's relying on its field units to tailor contracts to local conditions is based on interviews with numerous DOE field officials. This statement is not an implied criticism of how DOE negotiates contracts. Also, we disagree with DOE's characterization that contractors' preferences are "generally irrelevant" when accounting for the variations that exist among laboratory contractors. As DOE noted, contractors' preferences are reflected in the negotiation process. In our discussions with DOE field officials responsible for negotiating contracts, laboratory contractors' preferences on fees were cited as a critical factor in determining fee structures. 8. Our report recognizes that developing the optimum number of performance measures is a challenge, as reflected in the wide range of performance measures in use even among similar laboratories. We are not suggesting that any two contractors should have the same measures or the same number of measures. Our point is that DOE continues to struggle with finding the right number of measures. To further illustrate, the University of California's fiscal year 1998 contracts for its two weapons laboratories--Lawrence Livermore and Los Alamos--contain 83 and 120 performance measures, respectively, even though these laboratories are very similar in budget and scope. They are, however, managed by different DOE field units. 9. Our purpose in including comments we received from DOE field units is to illustrate the wide differences in philosophy about the use of fees to motivate laboratory contractors. Several DOE field staff, as well as contractors, told us that they strongly believe that providing fees does not motivate contractors, including both for-profit and not-for-profit contractors. Moreover, our statement that performance-based contracting has tended to focus in some instances on monetary rewards at the expense of good science was a frequent comment from both DOE field officials and laboratory contractors. Thus, it is very important to identify the need for monetary incentives where they are appropriate. Other motivations that DOE cited for laboratory contractors, such as their reputations in the scientific community and desire for contract extensions, were added to our report. These differences in philosophy account for some of the variation in contracts. 10. Our report reflects information provided directly from DOE field staff, who we were advised by DOE headquarters were the proper source for this information. The data in DOE's comments are reflected in the appendixes to our report. We have also revised our report to show that there are now 18 laboratory contractors, reflecting a recent change in how DOE defines its laboratories. 11. DOE field officials told us that performance fees are used to encourage superior performance. Asserting that fees are used to link performance to financial reward is self-evident in this context. 12. We agree with DOE that no single approach in contracting has proven to be optimum, and we reflected this view in our report. Regarding the wide variability in fee arrangements, we stated that there was very little consistency among the contracts of similar laboratory contractors conducting similar work. We also stated that local conditions influence the variability in laboratory contracts. 13. Our wording was taken from DOE's guidance on performance-based contracting. As we state in our report, prior assessments of performance-based contracting have not focused on laboratory contractors. We also stated in our report that DOE believes that the results from its assessments of performance-based contracting have been positive. We believe it is a logical and desirable step for DOE to determine whether performance-based contracting is improving performance at lower cost in its national laboratories. Also, we are not suggesting that DOE should abandon its performance-based approach or that it should eliminate performance-based fees in its laboratory contracts. It is also not our intent to show that performance-based contracting should be abandoned if its impacts on the laboratories cannot be measured. We believe that effective implementation of performance-based contracting provisions is dependent on the ability to support the fee amounts paid through a cost and benefit analysis. While it may appear intuitively obvious that defining performance expectations and measuring results are effective management tools, it is not intuitively obvious that the government is receiving a reasonable return on its investments in fee amounts for laboratory contractors. Likewise, while DOE commented that increases in fees reflect, in part, the increased financial risks being borne by contractors, no cost-benefit analysis quantifying this increased financial risk has been completed; thus it is not possible to determine if the proper level of fee is appropriate for the risk assumed. 14. We recognize that laboratory contractor fees are relatively small percentages of the total contract amounts. However, these percentages, which translated into $100 million in fees for fiscal year 1998, must be considered in light of the fact that DOE's laboratories are government owned and that a laboratory contractor's financial risk is limited. To obtain information on the national laboratories' contracts, we interviewed officials from the following laboratories: Sandia National Laboratories and Los Alamos National Laboratory in New Mexico; Lawrence Berkeley National Laboratory, Lawrence Livermore National Laboratory, and the Stanford Linear Accelerator in California; the National Renewable Energy Laboratory in Colorado; the Idaho National Engineering and Environmental Laboratory in Idaho; the Oak Ridge National Laboratory in Tennessee; and the Argonne National Laboratory in Illinois. We also spoke with laboratory officials in other locations to obtain cost and status information. We asked officials at these laboratories to comment on the impact of performance-based contracting on their operations. We also interviewed Department of Energy (DOE) officials responsible for overseeing these laboratories. These officials were from DOE's operations offices in Albuquerque, New Mexico; Oakland, California; Oak Ridge, Tennessee; and Chicago, Illinois. We also interviewed DOE area and site office staff located at each of the operations offices we visited. To obtain a broader perspective, we interviewed DOE headquarters officials responsible for developing contracting policy. We conducted our review from September 1998 through April 1999 in accordance with generally accepted government auditing standards. 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 Department of Energy's (DOE) progress in implementing performance-based contracting at its national laboratories, focusing on: (1) the status of performance-based contracting in DOE's national laboratory contracts; and (2) DOE's efforts to determine the impact of performance-based contracting. GAO noted that: (1) DOE's use of performance-based contracting for its laboratories is in a state of transition; (2) while all laboratory contracts GAO examined had some performance-based features, GAO found wide variance in the number of performance measures and the types of fees negotiated; (3) about half of the 18 laboratory contracts have performance fees to encourage superior performance--a major goal of performance-based contracting; (4) most of the remaining laboratory contracts are still based on DOE's traditional fixed-fee arrangement in which the fees are paid regardless of performance; (5) DOE has not evaluated the impact of performance-based contracting on its laboratory contractors and, as a result, does not know if this new form of contracting is achieving the intended results of improved performance and lower costs; (6) specifically, DOE has not determined whether giving higher fees to encourage superior performance by its laboratory contractors is advantageous to the government, although GAO recommended in 1994 that DOE develop criteria for measuring the costs and benefits to the government of using higher fees; (7) fees for the laboratories totalled over $100 million for fiscal year 1998; (8) while the contractors were unable to cite measurable benefits achieved by switching to performance-based contracting, they support its goals; and (9) the main benefits from performance-based contracting cited by laboratory contractors was that it has helped DOE clarify what it expects from the contractors and that it has improved communication.

The child welfare system encompasses a broad range of activities, including child protective services (CPS), which investigates reports of child abuse services to support and preserve families; and foster care for children who cannot live safely at home. maintenance expenses of foster care was estimated at about $3.6 billion in 1997. Additional federal funds are provided to states for a wide range of other child welfare and family preservation and support services, and these were estimated at about $500 million in 1997. As an integral part of the child welfare system, foster care is designed to ensure the safety and well-being of children whose families are not caring for them adequately. Beyond food and housing, foster care agencies provide services to children and their parents that are intended to address the problems that brought the children into the system. Agencies are also required to develop a permanency plan for foster children to make sure they do not remain in the system longer than necessary. Usually, the initial plan is to work toward returning the children to their parents. If attempts to reunify the family fail, the agency is to develop a plan to place the children in some other safe, permanent living arrangement, such as adoption or guardianship. According to federal statute, the court must hold a permanency planning hearing no later than 18 months after a child enters foster care. Proposed federal legislation would shorten this time frame to 12 months, in the hope of reducing the time a child spends in foster care. Some states have already adopted this shorter time frame. Children come to the attention of the child welfare system in two ways--either shortly after birth because they were exposed to drugs or alcohol in-utero or sometime later because they have been abused or neglected. Children with substance abusing parents enter foster care in either way. Many state statutes require that drug- or alcohol-exposed infants be reported, and some of these children are subsequently removed from the custody of their parents if an investigation determines that they have been abused or neglected. In some states, prenatal substance exposure itself constitutes neglect and is grounds for removing children from the custody of their parents. Large numbers of children in foster care are known to have been prenatally substance exposed. In an earlier study, we estimated that close to two-thirds of young foster children in selected locations in 1991 had been prenatally exposed to drugs and alcohol, up from about one-quarter in 1986. In both years, cocaine was the most prevalent substance that young foster children were known to have been exposed to, and the incidence of this exposure increased from about 17 percent of young foster children in 1986 to 55 percent in 1991. Moreover, among those who had been prenatally exposed who were in foster care in 1991, about one quarter had been exposed to more than one substance. The actual number of young foster children who had been exposed to drugs or alcohol in-utero may have been much higher because we relied on the mother's self-reporting of drug or alcohol use or toxicology test results of the mother or infant to document prenatal exposure. Yet, not all children or mothers are tested at birth for drugs, and even when they are tested, only recent drug or alcohol use can be confirmed. Older children of substance abusing parents also may enter foster care because they have been abused or neglected as a result of their parents' diminished ability to properly care for them. Abuse and neglect of children of all ages, as reported to CPS agencies, more than doubled from 1.1 million to over 2.9 million between 1980 and 1994, and a Department of Health and Human Services (HHS) report found that the number of CPS cases involving substance abuse can range from 20 to 90 percent, depending on the area of the country. For example, we recently found that about 75 percent of confirmed cases of child abuse and neglect in New York City involved substance abuse by at least one parent or caregiver. Many of these parents live in drug-infested and poor neighborhoods that intensify family problems. Neglect is most frequently cited as the primary reason children are removed from the custody of their parents and placed in foster care. According to the Office of Child Abuse and Neglect, the children of parents who are substance abusers are often neglected because their parents are physically or psychologically absent while they seek, or are under the influence of, alcohol and other harmful drugs. Sixty-eight percent of young children in foster care in California and New York in 1991 were removed from their parents as a result of neglect or caretaker absence or incapacity. No other reasons for removal accounted for a large portion of entries of young children into foster care. Physical, sexual, and emotional abuse combined accounted for only about 7 percent of removals of these young children. Parental substance abuse not only adversely affects the well-being of children, it also places additional strain on the child welfare system. The foster care population increased dramatically between 1985 and 1995 and is estimated to have reached about 494,000 by the end of 1995. As a consequence, foster care expenditures have risen dramatically. Between 1985 and 1995, federal foster care expenditures under title IV-E of the Social Security Act increased from $546 million to about $3 billion. We found that a greater portion of foster care expenditures in some locations shifted to the federal government between 1986 and 1991 because much of the growth in the population of young foster children involved poor families who were eligible for federal funding. Parental substance abuse is involved in a large number of cases. We have previously reported that an estimated 78 percent of young foster children in 1991 in selected locations had at least one parent who was abusing drugs or alcohol. Our recent interviews with child welfare officials in Los Angeles County, California, and Cook County, Illinois, have confirmed that the majority of foster care cases in these counties for children of all ages involve parental substance abuse. Officials in these locations stated not only that cocaine use among parents of foster children is still pervasive but that the use of other highly addictive and debilitating drugs, such as heroin and methamphetamines, appears to be on the rise. In addition, officials confirmed that use of multiple substances is common. In addition to the large number of foster care cases involving parental substance abuse, the complexities of these family situations place greater demands on the child welfare system. Most of the families of the young foster children in selected locations whose case files we reviewed had additional children in foster care, and at least one parent was absent. About one-third of the families were homeless or lacked a stable residence. Some had at least one parent who had a criminal record or was incarcerated, and in some families domestic violence was a problem. In addition, child welfare officials in Los Angeles and Cook Counties recently told us that dual diagnosis of substance addiction and mental illness is common among foster parents. The National Institute of Mental Health reported in 1990 that most cocaine abusers had at least one serious mental disorder such as schizophrenia, depression, or antisocial personality disorder. a woman with four children, all of whom were removed from her custody as a result of neglect related to her cocaine abuse. The youngest child entered foster care shortly after his birth. By that time, the three older children had already been removed from their mother's custody. All four of the children were placed with their grandmother. The mother had a long history of cocaine abuse that interfered with her ability to parent. At least two of her four children were known to have been prenatally exposed to cocaine. She also had been convicted of felony drug possession and prostitution, lacked a stable residence, and was unemployed. The father was never located, although it was discovered that he had a criminal record for felony drug possession and sales. Despite the mother's long history of drug use and related criminal activity, she eventually completed a residential drug treatment program that lasted about 1 year, participated in follow-up drug treatment support groups, and tested clean for over 6 months. In addition, she completed other requirements for family reunification, such as attending parenting and human immunodeficiency virus (HIV) education classes, and she was also able to obtain suitable housing. Although the mother was ultimately reunified with her youngest child, it took a considerable amount of time and an array of social services to resolve this case. The child was returned to his mother on a trial basis about 18 months after he entered foster care. The child welfare system retained jurisdiction for about another year, during which family maintenance services were provided. In addition, many foster children have serious health problems, some of which are associated with prenatal substance exposure, which further add to the complexity of addressing the service needs of these families. We found that over half of young foster children in 1991 had serious health problems, and medical research has shown that many of the health problems that these children had, such as fetal alcohol syndrome, developmental delays, and HIV, may have been caused or compounded by prenatal exposure to drugs or alcohol. children places on parents, who are at the same time recovering from drug or alcohol addictions. Some caseworkers find it difficult to manage the high caseloads involving families with increasingly complex service needs. Some states have experienced resource constraints, including problems recruiting and retaining caseworkers, shortages of available foster parents, and difficulties obtaining needed services, such as drug treatment, that are generally outside the control of the child welfare system. Caseworkers are also experiencing difficulties resolving cases. Once children are removed from the custody of their parents, they sometimes remain in foster care for extended periods. The problem of children "languishing" or remaining in foster care for many years has become a great concern to federal and state policymakers. While most children are reunified with their parents, adopted, or placed with a guardian, others remain in foster care, often with relatives, until they age out of the system. The circuitous and burdensome route out of foster care--court hearings and sometimes more than one foster care placement--can take years, be extremely costly, and have serious emotional consequences for children. Yet, making timely decisions about children exiting foster care can be difficult to reconcile with the time a parent needs to recover from a substance abuse problem. Current federal and state foster care laws emphasize both timely exits from foster care and reunifying children with their parents. However, even for those who are able to recover from drug and alcohol addictions, it can be a difficult process that generally involves periods of relapse as a result of the chronic nature of addiction. Achieving timely exits from foster care may sometimes conflict with the realities of recovering from drug and alcohol addictions. The current emphasis on speeding up permanency decisions will further challenge child welfare agencies. the time allowed before holding a permanency planning hearing from 18 to 12 months. As of early 1996, 23 states had already enacted shorter time frames for holding a permanency planning hearing than required under federal law. In two of these states, the shorter time frames apply only to younger children. It should be emphasized, however, that while a permanency planning hearing must be held within these specified time frames, the law does not require that a final decision be made at this hearing as to whether family reunification efforts should be continued or terminated. Some drug treatment administrators and child welfare officials in these same locations believe that shorter time frames might help motivate a parent who abuses drugs to recover. However, expedited time framesmay require that permanency decisions be made before it is known whether the parent is likely to succeed in drug treatment. While one prominent national study found that a large proportion of cocaine addicts failed when they attempted to stay off the drug, we previously reported that certain forms of treatment do hold promise. In addition, progress has been made in the treatment of heroin addiction through traditional methadone maintenance programs and experimental treatments. However, even when the parent is engaged in drug treatment, treatment may last up to 1 or 2 years, and recovery is often characterized as a lifelong process with the potential for recurring relapses. Some drug treatment administrators in Los Angeles and Cook Counties believe that treatment is more likely to succeed if the full range of needs of the mother are addressed, including child care and parenting classes as well as assistance with housing and employment, which help the transition to a drug-free lifestyle. These drug treatment administrators also stressed how important it was for parents who are reunited with their children to receive supportive services to continue their recovery process and help them care for their children. behavior. Some caseworkers in Los Angeles and Cook Counties said that shorter time frames for holding a permanency planning hearing may be appropriate in terms of the foster child's need for a permanent living arrangement. However, they also said that the likelihood of reunifying these children with their parents when permanency decisions must be made earlier may be significantly reduced when substance abuse is involved. In their view, the prospects of reunifying these families may be even worse if the level of services currently provided to them is not enhanced. In our ongoing work, we have found that states and localities are responding to the need for timely permanency for foster children through programmatic initiatives and changes to permanency laws. Most of these initiatives and changes to permanency laws are very new, so there is little experience to draw upon to determine whether they will help achieve timely exits from foster care for cases involving parental substance abuse. Furthermore, some of these initiatives and changes are controversial and reflect the challenge of balancing the rights of parents with what is in the best interest of the child, within the context of a severely strained child welfare system. For example, California and Illinois have enacted statutory changes that specifically address permanency for foster care cases involving parental substance abuse. The Illinois legislature recently enacted new grounds for terminating parental rights. Under this statute, a mother who has had two or more infants who were prenatally exposed to drugs or alcohol can be declared an unfit parent if she had been given the opportunity to participate in treatment when the first child was prenatally exposed. California has enacted new statutory grounds for terminating family reunification services if the parent has had a history of "extensive, abusive, and chronic" use of drugs or alcohol and has resisted treatment during the 3-year period before the child entered foster care or has failed or refused to comply with a program of drug or alcohol treatment described in the case plan on at least two prior occasions, even though the programs were available and accessible. While such laws may help judges make permanency decisions when the prospects for a parent's recovery from drug abuse seem particularly poor, these changes are not without controversy. Some caseworkers and dependency court attorneys in Los Angeles and Cook Counties expressed concerns that a judge may closely adhere to the exact language in the statutes without considering the individual situation, and may disregard the extent to which progress has been made toward recovery during the current foster care episode. States and localities are undertaking programmatic initiatives that may also help to reconcile the goals of family reunification and timely exits from foster care, which may conflict, particularly when parental substance abuse is involved. New permanency options are being explored as are new ways to prevent children from entering foster care in the first place. We previously reported on Tennessee's concurrent planning program that allows caseworkers to work toward reunifying families, while at the same time developing an alternate permanency plan for the child if family reunification efforts do not succeed. Under a concurrent planning approach, caseworkers emphasize to the parents that if they do not adhere to the requirements set forth in their case plan, parental rights can be terminated. Tennessee officials attributed their achieving quicker exits from foster care for some children in part to parents making more concerted efforts to make the changes needed in order to be reunified with their children. In addition, both California and Illinois have federal waivers for subsidized guardianship, under which custody is transferred from the child welfare agency to a legal guardian. In Illinois, CPS cases involving prenatally substance exposed infants can be closed by the child welfare agency without removing the child from the mother's custody if the mother can demonstrate sufficient parental capacity and is willing to participate in drug treatment and receive other supportive services. One jurisdiction is developing an approach to deliver what its officials describe as enriched services to the parent. Illinois' new performance contracting initiative provides an incentive for private agencies to achieve timely foster care exits for children by compensating these agencies on the basis of their maintaining a prescribed caseload per caseworker. This necessitates that an agency find permanent living arrangements for a certain number of children per caseworker per year, or the agency absorbs the cost associated with managing higher caseloads. A component of this initiative is the provision of additional resources for improved case management and aftercare services in order to better facilitate family reunification and reduce the likelihood of reentry. Providing enriched services may make it less likely that judges will rule that the child welfare agency has failed to make reasonable efforts to reunify parents with their children and thereby reduce delays in permanency decisionmaking. substance exposure, or later in life when they are found to have been abused or neglected. The families of these children have increasingly complex service needs. Many are dually diagnosed with drug or alcohol addictions and mental illnesses, some are involved in criminal activities, some are homeless, and most have additional children in foster care. Burgeoning foster care caseloads entailing these complex family situations have placed enormous strains on the child welfare system. In seeking to achieve what is in the best interest of children, foster care laws emphasize both family reunification and achieving timely exits from foster care for children. Given the time it often takes a person to recover from drug and alcohol addictions, and the current emphasis on speeding up permanency decisions for foster children, these goals may conflict. Reconciling these goals for children whose parents have a substance abuse problem presents a tremendous challenge to the entire child welfare system in determining how to balance the rights of parents with what is truly in the best interest of children. New state and local initiatives may help address this challenge. Through our ongoing work, we are continuing to explore the impact of parental substance abuse on foster care, by, for example, examining parents' substance abuse histories and their drug treatment experiences, as well as exploring initiatives that might help achieve timely foster care exits for cases involving parental substance abuse. Mr. Chairman, this concludes my prepared statement. I would be happy to respond to any questions from you or other Members of the Subcommittee. Child Protective Services: Complex Challenges Require New Strategies (GAO/HEHS-97-115, July 21, 1997). Foster Care: State Efforts to Improve the Permanency Planning Process Show Some Promise (GAO/HEHS-97-73, May 7, 1997). Cocaine Treatment: Early Results From Various Approaches (GAO/HEHS-96-80, June 7, 1996). Child Welfare: Complex Needs Strain Capacity to Provide Services (GAO/HEHS-95-208, Sept. 26, 1995). Foster Care: Health Needs of Many Young Children Are Unknown and Unmet (GAO/HEHS-95-114, May 26, 1995). Foster Care: Parental Drug Abuse Has Alarming Impact on Young Children (GAO/HEHS-94-89, Apr. 4, 1994). Drug Abuse: The Crack Cocaine Epidemic: Health Consequences and Treatment (GAO/HRD-91-55FS, Jan. 30, 1991). Drug-Exposed Infants: A Generation at Risk (GAO/HRD-90-138, June 28, 1990). 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 discussed the implications of parental substance abuse for children and the child welfare system, and permanency planning for foster care cases involving parental substance abuse, focusing on reviews of the substance abuse histories and drug treatment experiences of parents, as well as initiatives that might help achieve timely exits from foster care for cases involving parental substance abuse. GAO noted that: (1) for many children, it is parental substance abuse that brings them to the attention of the child welfare system; (2) when a newborn has been found to have been prenatally exposed to drugs or alcohol, this often triggers an investigation of suspected child abuse and neglect; (3) in some states, prenatal substance exposure itself constitutes neglect and is grounds for removing a child from its parents; (4) substance abuse can damage a parent's ability to care for older children as well, and can lead to child abuse or neglect; (5) as a result, some of these children are removed from the custody of their parents and placed in foster care; (6) once a child is in the system, parental substance abuse is a significant hurdle in their path out of the system--a hurdle that requires drug or alcohol treatment for the parent in addition to other services for the family; (7) the nature of drug and alcohol addiction means a parent's recovery can take a considerable amount of time; (8) other problems these parents face, such as mental illness and homelessness, further complicate these cases; (9) foster care cases that involve parental substance abuse, therefore, place an additional strain on a child welfare system already overburdened by the sheer number of foster care cases; (10) child welfare agencies are charged with ensuring that foster care cases are resolved in a timely manner and with making reasonable efforts to reunite children with their parents; (11) ideally, both of these goals are to be achieved; (12) however, even for parents who are able to recover from drug or alcohol abuse problems, recovery can be a long process; (13) child welfare officials may have difficulties making permanency decisions within shorter time frames before they know whether the parent is likely to succeed in drug treatment; (14) so, when parental substance abuse is an issue in a foster care case, it may be difficult to reconcile these two goals; and (15) the foster care initiatives and laws that some states and localities are instituting may help reconcile the goals of family reunification and timely exits from foster care for the cases involving parental substance abuse.

Ex-Im is an independent agency operating under the Export-Import Bank Act of 1945, as amended. Its mission is to support the export of U.S. goods and services, thereby supporting U.S. jobs. Ex-Im's charter states that it should not compete with the private sector. Rather, Ex-Im's role is to assume the credit and other risks that the private sector is unable or unwilling to accept, while still maintaining a reasonable assurance of repayment. When private-sector lenders reduced the availability of their financing after the 2007 to 2009 financial crisis, demand for Ex-Im products correspondingly increased. According to Ex-Im data, the amount of financing Ex-Im authorized increased from $12.2 billion in fiscal year 2006 to $35.8 billion in fiscal year 2012, before declining to $27.3 billion in fiscal year 2013 and $20.5 billion in fiscal year 2014. Though smaller than the fiscal year 2012 peak, Ex-Im's fiscal year 2014 total authorizations are a 68 percent increase in nominal terms over its total authorizations in fiscal year 2006. Over the same period, Ex-Im's financial exposure (outstanding financial commitments) increased from $57.8 billion to $112 billion, or by 94 percent in nominal terms. According to U.S. budget documents, Ex-Im's number of full-time equivalent employees grew from 380 to 397 from fiscal year 2006 through fiscal year 2014, an increase of about 4.5 percent. Ex-Im offers export financing through direct loans, loan guarantees, and insurance. Ex-Im's loan guarantees cover the repayment risk on the foreign buyer's loan obligations incurred to purchase U.S. exports. Loan guarantees are classified as short, medium, or long term. Although the number of Ex-Im's short-term (working capital) guarantees greatly exceeds the number of its medium- and long-term loan guarantees, long- term loan guarantees account for the greatest dollar value of Ex-Im loan guarantees. Ex-Im is one of several ECAs worldwide that provide export financing support. Other countries' ECAs range from government agencies to private companies contracted by governments. Most, including Ex-Im, are expected to supplement, not compete with, the private market. An international agreement, the Organisation for Economic Co-operation and Development (OECD) Arrangement on Officially Supported Export Credits, governs various aspects of U.S. and other member countries' ECAs, but increasing activity of nonmembers threatens its ability to provide a level playing field for exporters. Several agreements have been made that decrease subsidies and increase transparency among ECAs. However, these agreements apply to participant ECAs, and important emerging countries, including China, are not part of the OECD arrangement. Ex-Im faces multiple risks when it extends export credit financing, including: Credit risk: the risk that an obligor may not have sufficient funds to service its debt or be willing to service its debt even if sufficient funds are available. Political risk: the risk of nonrepayment resulting from expropriation of the obligor's property, war, or inconvertibility of the obligor's currency into U.S. dollars. Market risk: the risk of loss from declining prices or volatility of prices in the financial markets. Concentration risk: risk stemming from the composition of a credit portfolio, for example through an uneven distribution of credits within a portfolio. Foreign-currency risk: the risk of loss as a result of appreciation or depreciation in the value of a foreign currency in relation to the U.S. dollar in Ex-Im transactions denominated in that foreign currency. Operational risk: the risk of loss resulting from inadequate or failed internal processes, people, and systems, or from external events. During underwriting, Ex-Im reviews a transaction and assigns it a risk rating based on its assessment of the creditworthiness of the obligors and to establish whether there is a reasonable assurance of repayment. Ex-Im also manages risks through (1) monitoring and restructuring--updating risk ratings and restructuring individual transactions with credit weaknesses to help prevent defaults and increase recoveries and (2) recovery of claims--collecting on the assets of the obligors or the collateral for a transaction that defaults. While demand for its services generally drives Ex-Im's business, Congress has mandated that Ex-Im support specific objectives and operate within certain parameters. For example, since the 1980s, Congress has required that Ex-Im make available a percentage of its total export financing each year for small business. In 2002, this requirement increased from 10 percent to 20 percent of total authorizations. Congress further instructed that Ex-Im promote the expansion of its financial commitments in sub-Saharan Africa. In annual appropriation acts, Congress has directed that "not less than 10 percent of the aggregate loan, guarantee, and insurance authority available to ...should be used for renewable energy technologies or end-use energy efficiency technologies"--which we refer to as the renewable energy mandate. Congress has also imposed a limit, currently $140 billion, on Ex-Im's total aggregate outstanding amount of financing, referred to as the exposure limit. In addition, Ex-Im must provide financing on a competitive basis with other export credit agencies, minimize competition in government- supported export financing, and submit annual reports to Congress on its actions. In six reports on Ex-Im issued since March 2013, we presented findings and made 16 recommendations to improve Ex-Im's operations, summarized in this testimony in three broad areas: (1) portfolio risk management, (2) underwriting and fraud prevention processes, and (3) exposure forecasting and reporting on estimates of its impact on U.S. jobs. Our recent work has produced several findings and recommendations about how Ex-Im manages risks related to the overall size and composition of its portfolio. Our March 2013 report on risk management and our May 2013 report on exposure, risk, and resources made a total of six recommendations in this area. Ex-Im agreed with all of these recommendations and has taken action to implement them. Ex-Im calculates credit subsidy costs and loss reserves and allowances with a loss estimation model that uses historical data and takes credit, political, and other risks into account. Consistent with industry practices, Ex-Im added qualitative factors to the model in 2012--including a factor to account for changes in global economic conditions-- to adjust for circumstances that may cause estimated credit losses to differ from historical experience. However, in March 2013, we concluded that the short-term forecast Ex-Im used to account for global economic changes might not be appropriate for adjusting estimated defaults for longer-term products and could lead to underestimation of credit subsidy costs and loss reserves and allowances. We recommended that Ex-Im assess whether it was using the best available data for adjusting its loss estimates. In November 2013, Ex-Im incorporated a longer-term forecast of global economic change into its loss estimation model. As a result, we consider this recommendation implemented and closed. In our March 2013 report, we also found that Ex-Im was not maintaining the data it needed to compare the performance of newer transactions with older transactions at comparable points in time, a type of analysis recommended by federal banking regulators. This analysis, known as vintage analysis, can help evaluate the credit quality of recent transactions by comparing their early performance with the early performance of older transactions. As such, it can provide early warning of potential performance problems in newer business. Ex-Im's default rate declined steadily from about 1.6 percent as of September 30, 2006, to 0.29 percent as of September 30, 2012, and, more recently, Ex-Im reported a further decline to 0.17 percent as of the end of December However, we concluded that this downward trend should be 2014.viewed with caution because Ex-Im's portfolio contained a large volume of recent transactions that had not reached their peak default periods. We recommended that Ex-Im retain point-in-time performance data to compare the performance of newer and older business and enhance loss modeling. Ex-Im began retaining such data in 2013. We therefore consider this recommendation implemented and closed. GAO-13-303. Ex-Im is not bound by federal banking regulator guidance, but it faces risk- Office of the Inspector General, Export-Import Bank of the United States, Report on Portfolio Risk and Loss Reserve Allocation Policies, OIG-INS-12-02 (Washington, D.C.: September 2012). oversight and be consistent with federal internal control standards for effective external communication. We also found that Ex-Im had begun to implement stress testing and recommended that Ex-Im report its stress test scenarios and results to Congress. Ex-Im began reporting its scenarios and results in quarterly reports to Congress on default rates, beginning with the report for the fourth quarter of 2013. In that report, Ex- Im described the stress test scenarios and provided some information about results. Hence, we consider this recommendation implemented and closed. In our May 2013 report, we found that Ex-Im had not routinely reported the performance or risk ratings of its subportfolios for the congressional mandates on small business, sub-Saharan Africa, and renewable energy, though these transactions generally were more risky than Ex-Im's overall portfolio. We recommended that Ex-Im routinely report to Congress the financial performance of subportfolios supporting congressional mandates. Ex-Im began reporting this information in its default rate report to Congress for the quarter ending June 30, 2013. As a result, we consider this recommendation implemented and closed. GAO-13-620. reorganized to improve efficiency. Additionally, Ex-Im has agreed to implement, and in some cases has begun implementing, suggestions by the contractor to mitigate risks of future workload increases. As a result, we consider this recommendation implemented and closed. In our May 2013 report, we found that Ex-Im expected that administrative resource constraints might prevent it from meeting its congressionally mandated target for small business export financing. The target is fixed to a percentage of the dollar value of Ex-Im's total authorizations. Although Ex-Im has dedicated resources to support the mandate, as Ex- Im authorizations have grown, the corresponding growth in the value of the target has outpaced Ex-Im's increasing support. According to Ex-Im officials, processing small business transactions and bringing in new small business customers is resource-intensive. We concluded that it was important for Ex-Im to communicate to Congress the effect of percentage- based mandates on its operations, as well as the potential impacts such mandates might have on Ex-Im's resources and operations. We recommended that Ex-Im provide Congress with additional information on the resources associated with meeting its percentage-based mandates. Ex-Im agreed and told us it planned to provide information on resources associated with meeting such mandates in its fiscal year 2016 budget submission. Ex-Im's fiscal year 2016 Congressional Budget Justification includes both information on the resources associated with these mandates and Ex-Im's plans to hire additional staff to help meet them. As a result, we consider this recommendation implemented and closed. GAO-14-642R. deliveries of 789 Boeing large commercial aircraft, while European ECAs supported deliveries of 821 Airbus large commercial aircraft. Buyers of large commercial aircraft have also used a number of non-ECA financing options for procuring wide-body jets. From 2008 through 2013, Ex-Im and European ECAs supported 26 percent of large commercial aircraft deliveries. Our most recent mandated report, in September 2014, found that Ex-Im had implemented many key aspects of its underwriting process but identified weaknesses in certain procedures.recommendations to Ex-Im to enhance its loan guarantee underwriting process and further document aspects of its underwriting and processes to detect, prevent, and investigate fraud. Our August 2014 report on Ex- Im's monitoring of dual-use exports also found weaknesses in Ex-Im's procedures. Our review of a statistical sample of loan guarantees indicated that Ex-Im had implemented many key aspects of the underwriting process as required by its Loan, Guarantee, and Insurance Manual. However, the manual did not (1) include certain procedures or sufficiently detailed instructions to verify compliance with Ex-Im's requirements and consistency with federal guidance, such as a procedure to verify that applicants did not have delinquent federal debt; (2) include instructions for loan officers to use credit reports and for the inclusion of all required documents and analyses in the loan file prior to approval; and (3) call for assessments of collateral, as required by federal guidance, for certain loan guarantee transactions prior to approval. Furthermore, Ex-Im did not have mechanisms to verify compliance with certain established procedures, including documenting certain loan guarantee eligibility procedures. We recommended that Ex-Im take the following actions: Develop and implement procedures, prior to loan guarantee approval, for (1) verifying that transaction applicants are not delinquent on federal debt and (2) performing assessments of collateral for nonaircraft medium- and long-term loan guarantee transactions. Establish mechanisms to oversee compliance with Ex-Im's existing procedures, prior to loan guarantee approval, for (1) obtaining credit reports for borrowers or documenting why they were not applicable, (2) documenting certain eligibility procedures, and (3) documenting the analysis of country exposure. Develop and implement detailed instructions, prior to loan guarantee approval, for (1) preparing and including all required documents or analyses in the loan file and (2) using credit reports in the risk assessment and due diligence process. Update the Character, Reputational, and Transaction Integrity review process to include the search of databases to help identify transaction applicants with delinquent federal debt that would then not be eligible for loan guarantees. As of April 2015, Ex-Im has revised its Loan, Guarantee, and Insurance Manual in response to the first three recommendations from our September 2014 report. We consider the second and third of these recommendations to be implemented and are taking actions to close them. With respect to the first of these recommendations, we are continuing to review Ex-Im's actions. In addition, Ex-Im officials have stated that they have been working with the Department of the Treasury on the fourth recommendation to determine the technical feasibility of an automated method to access a Treasury database to verify that applicants are not delinquent on federal debt. We are currently reviewing Ex-Im's actions related to this recommendation. Our September 2014 report additionally found weaknesses in Ex-Im's documentation of aspects of its underwriting and overall procedures related to fraud. We found that Ex-Im had not documented its risk-based approach for scheduling examinations to monitor lenders with delegated authority to approve guaranteed loans. In addition, while Ex-Im had processes to prevent, detect, and investigate fraud, it had not documented its overall fraud processes. Such documentation is recommended by several authoritative auditing and antifraud organizations. We therefore recommended that Ex-Im document: its risk-based approach for scheduling delegated authority lender examinations, and its overall fraud-prevention process, including the roles and responsibilities of Ex-Im divisions and officials that are key participants in Ex-Im's process. As of April 2015, Ex-Im has revised its Loan, Guarantee, and Insurance Manual to further document its approach and has documented its overall processes related to fraud, including describing the roles and responsibilities of Ex-Im divisions and officials that are key participants in these processes. Therefore we consider these recommendations to be implemented and are taking actions to close them. Our August 2014 annual report on Ex-Im's monitoring of dual-use exports also found weaknesses in Ex-Im's documentation of required procedures. We found that Ex-Im had received some but not all of the information it required in its credit agreements regarding the three dual- use transactions it financed in fiscal year 2012, and that some of the information it had received was late. As a result, we found that Ex-Im did not have complete and timely information about whether the items were actually being used in accordance with the terms of the agreements and Ex-Im policy. We recommended that Ex-Im establish steps that staff should take in cases where borrowers do not submit required end-use documentation within the time frames specified in their financing agreements and ensure that these efforts are well documented. In response to our recommendation, Ex-Im revised its 1997 memorandum on the implementation of its dual-use policy for military applications to provide more specific guidance and disseminated the revised memo to relevant staff. During our current annual review of Ex-Im's dual-use financing, we are following up with Ex-Im to see how this revised guidance is being implemented. In two May 2013 Ex-Im reports, we reported weaknesses in how Ex-Im estimated its future exposure, and we reported the limitations in its calculations of the number of jobs its financing supports. We made two recommendations related to how Ex-Im prepares forecasts and one recommendation on its reporting jobs impact reporting. Ex-Im agreed with all three recommendations and took actions to address them. In our May 2013 report on Ex-Im's exposure and resources, we found weaknesses in the methodology Ex-Im used to forecast future financial Although Ex-Im's forecast model is sensitive to key exposure levels.assumptions, Ex-Im had not reassessed these assumptions to reflect changing conditions, nor had it conducted sensitivity analyses to assess and report the range of potential outcomes. We made two recommendations to Ex-Im: (1) that Ex-Im compare previous forecasts and key assumptions to actual results and adjust its forecast models to incorporate previous experience and (2) that Ex-Im assess the sensitivity of the exposure forecast model to key assumptions and estimates and identify and report the range of forecasts based on this analysis. Ex-Im put in place new methodologies for its 2015 budget estimates. Specifically, Ex-Im compared the results of its existing authorization forecast method with actual results and enhanced its calculation of expected repayments and authorizations by incorporating historical experience into the methodology. Additionally, Ex-Im created statistical models to validate its forecasts and provide a range of estimates. Therefore, we consider these two recommendations implemented and closed. GAO-13-446. example, the employment data are a count of jobs that treats full-time, part-time, and seasonal jobs equally. In addition, Ex-Im's calculations assume that the firm receiving Ex-Im support uses the same number of jobs as the industry-wide average, but Ex-Im's clients could be different from the typical firm in the same industry. Ex-Im did not report these limitations or fully detail the assumptions related to its data or methodology. We recommended that Ex-Im improve reporting on the assumptions and limitations in the methodology and data used to calculate the number of jobs Ex-Im supports through its financing. Ex-Im's 2013 and 2014 annual reports included greater detail on these issues; therefore, we consider this recommendation implemented and closed. In conclusion, our reviews of Ex-Im since the 2012 Reauthorization Act have identified a number of areas in which Ex-Im could improve its operations. Ex-Im has shown a willingness to reexamine its operations, agreeing with all of our recent recommendations and implementing a number of them. However, managing a large export financing portfolio with its wide variety of associated risks is challenging. Therefore, to sustain the improvements it has made and address emerging challenges, it will be important for Ex-Im to effectively implement remaining audit recommendations and carefully manage risks in the evolving global financial marketplace. Chairmen Jordan and Huizenga, Ranking Members Cartwright and Moore, and Members of the Subcommittees, this concludes my statement. I would be pleased to respond to any questions you may have. For further information about this statement, 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 statement. Individuals making key contributions to this testimony include Celia Thomas, Assistant Director; Kathryn Bolduc; Marcia Carlsen; Michael Simon; and Steve Westley. The Chairman of the Export-Import Bank of the United States should direct the appropriate officials to develop and implement procedures, prior to loan guarantee approval, for (1) verifying that transaction applicants are not delinquent on federal debt, including using credit reports to make such a determination, and (2) performing assessments of collateral for nonaircraft medium- and long-term loan guarantee transactions. The Chairman of the Export-Import Bank of the United States should direct the appropriate officials to establish mechanisms to oversee compliance with Ex-Im's existing procedures, prior to loan guarantee approval, for (1) obtaining credit reports for transaction borrowers or documenting why they were not applicable; (2) documenting certain eligibility procedures, including the Character, Reputational, and Transaction Integrity reviews for medium- and long- term loan guarantee transactions, export item eligibility, and country eligibility; and (3) documenting the analysis of country exposure. The Chairman of the Export-Import Bank of the United States should direct the appropriate officials to develop and implement detailed instructions, prior to loan guarantee approval, for (1) preparing and including all required documents or analyses in the loan file and (2) using credit reports in the risk assessment and due diligence process. The Chairman of the Export-Import Bank of the United States should direct the appropriate officials to Update the Character, Reputational, and Transaction Integrity review process to include the search of databases to help identify transaction applicants with delinquent federal debt that would then not be eligible for loan guarantees. The Chairman of the Export-Import Bank of the United States should direct the appropriate officials to document Ex-Im's current risk-based approach for scheduling delegated authority lender examinations. The Chairman of the Export-Import Bank of the United States should direct the appropriate officials to document Ex-Im's overall fraud process, including describing the roles and responsibilities of Ex-Im divisions and officials that are key participants in Ex-Im's fraud processes. To ensure adequate and consistent oversight for monitoring the end use of dual-use items, the Chairman of the Export-Import Bank of the United States should strengthen Ex-Im guidance for monitoring end use. Specifically, Ex-Im should establish steps staff should take in cases where borrowers do not submit required end-use documentation within the time frames specified in their financing agreements and ensure that these efforts are well documented. To provide Congress with the appropriate information necessary to make decisions on Ex-Im's exposure limits and targets and to improve the accuracy of its forecasts of exposure and authorizations, the Chairman of the Export-Import Bank of the United States should compare previous forecasts and key assumptions to actual results and adjust its forecast models to incorporate previous experience. To provide Congress with the appropriate information necessary to make decisions on Ex-Im's exposure limits and targets and improve the accuracy of its forecasts of exposure and authorizations, the Chairman of the Export-Import Bank of the United States should assess the sensitivity of the exposure forecast model to key assumptions and authorization estimates and identify and report the range of forecasts based on this analysis. To help Congress and Ex-Im management understand the performance and risk associated with its subportfolios of transactions supporting the small business, sub-Saharan Africa, and renewable energy mandates, Ex-Im should routinely report financial performance information, including the default rate and risk rating, of these transactions at the subportfolio level. To better inform Congress of the issues associated with meeting each of the bank's percentage-based mandated targets, Ex-Im should provide Congress with additional information on the resources associated with meeting the mandated targets. To ensure better understanding of its jobs calculation methodology, the Chairman of Ex-Im Bank should increase transparency by improving reporting on the assumptions and limitations in the methodology and data used to calculate the number of jobs Ex-Im supports through its financing. To help improve the reliability of its loss estimation model, the Chairman of the Export-Import Bank of the United States should assess whether it is using the best available data for adjusting loss estimates for longer-term transactions to account for global economic risk. To conduct future analysis comparing the performance of newer and older business and to make future enhancements to its loss estimation model, the Chairman of the Export-Import Bank of the United States should retain point-in-time, historical data on credit performance. To help Congress better understand the financial risks associated with Ex-Im's portfolio, the Chairman of the Export-Import Bank of the United States should report its stress test scenarios and results to Congress when such information becomes available. To help manage operational risks stemming from Ex-Im's increased business volume, the Chairman of the Export-Import Bank of the United States should develop workload benchmarks at the agencywide and functional area levels, monitor workload against these benchmarks, and develop control activities for mitigating risks when workloads approach or exceed these benchmarks. This is a work of the U.S. government and is not subject to copyright protection in the United States. 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As the export credit agency of the United States, Ex-Im helps U.S. firms export goods and services by providing financing assistance, including direct loans, loan guarantees, and insurance. Following the 2007 to 2009 financial crisis, Ex-Im's authorizations and financial exposure both increased rapidly. To strengthen Ex-Im, Congress mandated several reform measures in the Export-Import Bank Reauthorization Act of 2012 and also required certain reviews and reports by GAO and others. Since March 2013, GAO has issued four reports mandated by the act ( GAO-13-303 , GAO-13-446 , GAO-13-620 , and GAO-14-574 ). In addition, in August and July 2014, GAO reported on Ex-Im's financing of exports with potential dual military and civilian uses and provided information on aircraft financing by Ex-Im and other countries' export credit agencies, respectively ( GAO-14-719 and GAO-14-642R ). This testimony summarizes the findings and recommendations in those six recent reports, and provides updated information on the status of Ex-Im's actions taken to address GAO's recommendations. To update the status of its recommendations, GAO reviewed Ex-Im's modified and updated procedures and documentation and interviewed Ex-Im officials. GAO is not making any new recommendations in this testimony. In six reports on the U.S. Export-Import Bank (Ex-Im) issued since March 2013, GAO presented findings and made 16 recommendations to improve Ex-Im's operations, summarized in this testimony in three broad areas: (1) risk management, (2) underwriting and fraud prevention, and (3) forecasting its exposure and reporting on its estimates of its impact on U.S. jobs. Six of GAO's recommendations focus on improving Ex-Im's management of risks related to its overall portfolio. For example, in March and May 2013, GAO recommended addressing weaknesses in Ex-Im's model for estimating losses, data retained to analyze default risks, reporting of portfolio stress testing, and analysis of staff resources. Ex-Im has implemented all 6 of these recommendations. In September 2014, GAO found that Ex-Im had implemented many key aspects of its underwriting process but identified weaknesses in the design, implementation and documentation of some procedures. For example, GAO found that Ex-Im did not have mechanisms to verify compliance with certain loan guarantee eligibility procedures and had not documented its overall processes related to fraud. Ex-Im has implemented 4 of the 6 recommendations in this report. It has not fully implemented 2 recommendations concerning assessing collateral on certain transactions and verifying that applicants are not delinquent on federal debt. GAO's August 2014 report on Ex-Im's transactions involving exports with potential dual military and civilian uses also found documentation weaknesses and made one recommendation. GAO is reviewing the status of Ex-Im's actions in the context of GAO's ongoing dual use review. Finally, in May 2013, GAO found weaknesses in how Ex-Im forecasts its aggregate outstanding amount of financing (exposure) and how it reports estimates of its impact on U.S. jobs. GAO recommended that Ex-Im (1) adjust its exposure forecast model to incorporate previous experience and (2) assess and report the model's sensitivity to key assumptions. GAO also recommended that Ex-Im improve reporting on the assumptions and limitations in its methodology and data for calculating the number of jobs it supports through its financing. Ex-Im has implemented GAO's 3 recommendations.

Each year, millions of visitors, foreign students, and immigrants come to the United States. Visitors may enter on a legal temporary basis--that is, with an authorized period of admission that expires on a specific date-- either with temporary visas (generally for tourism, business, or work) issued by the Department of State or, in some cases, as tourists or business visitors who are allowed to enter without visas. The latter group includes Canadians and qualified visitors from 27 countries who enter under the Visa Waiver Permanent program. The large majority of these visitors depart on time, but others overstay. Our definition of an overstay in this testimony is specifically this: An overstay is a foreign visitor who is legally admitted to the United States for a specific authorized period and remains in the United States after that period expires, unless an extension or a change of status has been approved. Although overstays are sometimes referred to as visa overstays, this is technically a misnomer for two reasons. First, a visitor can overstay the authorized period of admission set by the DHS inspector at the border while still possessing a valid visa. (For example, a visitor with a 6- month multiple-entry visa from the Department of State might be issued a 6-week period of admission by the DHS inspector and remain here for 7 weeks, thus overstaying.) Second, some visitors are allowed to enter the United States without visas and to remain for specific periods of time, which they may overstay. Form I-94 is the basis of the current overstay tracking system. For visitors from most countries, the period of admission is authorized (or set) by a DHS inspector when they enter the United States legally and fill out this form. Each visitor is to give the top half to the inspector and to retain the bottom half, which should be collected on his or her departure. When visiting the United States for business or pleasure, two major groups are exempt from filling out an I-94 form: Mexicans entering the United States with a Border Crossing Card (BCC) at the Southwestern border who intend to limit their stay to less than 72 hours and not to travel beyond a set perimeter (generally, 25 miles from the border) and Canadians admitted for up to 6 months without a perimeter restriction.Thus, the majority of Canadian and Mexican visits cannot be tracked by the current system, because the visitors have not filled out Form I-94. Tracking should be possible for almost all other legal temporary visitors, including visitors from visa waiver countries, because they are required to fill out the form. Terrorists might be better prevented from legally entering the United States if consular officials and DHS inspectors used improved watch lists to screen visa applicants and make border inspections. However, some terrorists may continue to slip through these border defenses. Keeping all dangerous persons and potential terrorist-suspects from legally entering the United States is difficult because some do not match the expected characteristics of terrorists or suspicious persons; in addition, some may not be required to apply for visas (that is, citizens of Canada or one of the 27 visa waiver countries). Watch lists have been improved somewhat since 9/11, but further improvements are needed. For example, earlier this year we reported that the State Department "with the help of other agencies, almost doubled the number of names and the amount of information" in its Consular Lookout and Support System. We also reported that "the federal watch list environment has been characterized by a proliferation of [terrorist and watch list] systems, among which information sharing is occurring in some cases but not in others." In this testimony today, we focus primarily on an overstay's illegal presence within the United States and the potential consequences for domestic security. Viewed in terms of individuals, the overstay process can be summarized as aliens' (1) legally visiting the United States, which for citizens of most nations is preceded by obtaining a passport and a visa and requires filling out Form I-94 at the U.S. border; (2) overstaying for a period that may range from a single day to weeks, months, or years; and, in some cases, (3) terminating their overstay status by exiting the United States or adjusting to legal permanent resident status (that is, obtaining a green card). Beyond that, the overstay process can be viewed more broadly in the context of our nation's layered defense. For example, figure 1 illustrates many issues in this defense that we have analyzed in numerous reports--ranging from overseas tracking of terrorists to stateside security for critical infrastructure locations and aviation. Significant numbers of visitors overstay their authorized periods of admission. A recent DHS estimate put the January 2000 resident overstay population at 1/3 of 7 million illegal immigrants, or 2.3 million. The method DHS used to obtain the 1/3 figure is complex and indirect, and we plan to evaluate that estimate further. However, the 2.3 million overstay estimate excludes specific groups, and we believe, therefore, that it potentially understates the extent of overstaying. By definition, DHS's estimate of 2.3 million overstays as of January 2000 represents only a part of the total overstay problem. DHS's estimate of 7 million illegal immigrants is limited to illegals who settled and were residing here at the time of the 2000 census. It includes only overstays who were in the actual census count or included in corrections for possible undercounts of illegal immigrants. DHS's estimate of overstays as of January 2000 is not defined to include the following groups: a. Visitors filling out Form I-94 who overstay for short periods of time. Many such persons are not likely to be included in the 2000 census, which is the starting point of DHS's 2.3 million estimate of the resident overstay population. In our ongoing work, we will examine indicators of the magnitude, and significance, of short-term overstaying among visitors who fill out I-94 forms. b. Mexican and Canadian visitors not filling out Form I-94 who overstayed and settled here. Overstays in this group are included in DHS's estimate of 7 million illegal immigrants, but they are categorized as illegal immigrants other than overstays. This is because DHS used I-94 data from the early 1990s and projected these data forward to obtain the 1/3 overstay proportion. overstay for short periods. As indicated above, many short-term overstays are not included in the 2000 census, which is the starting point of DHS's 2.3 million estimate of the resident overstay population. These groups are illustrated in figure 2. In part because of coverage issues, the extent of overstaying has not been definitively measured. In addition, the accuracy of DHS's estimate of the resident overstay population is not known with precision. Other limited data points may help illustrate the possible magnitude. For this testimony, we obtained two small-sample sources of data. First, we identified a government-sponsored survey, reported in 2002, that had (1) sampled more than 1,000 adult green-card holders, (2) asked them about their prior immigration status, and (3) found that more than 300 respondents self-reported prior illegal status. From the computer run we requested, we found that of the roughly 300 former illegals, about 1/3 said they were former overstays, with most of the remaining 2/3 reporting prior illegal border crossing. Second, we obtained data from Operation Tarmac, the 2001-03 sweep of airport employees who had access to sensitive areas. Although Operation Tarmac investigators had collected information on overstaying, they did not systematically record data for overstays versus illegal border crossers. We requested that DHS manually review a sample of case files and identify overstays. DHS reported to us that of 286 sampled cases in which illegal immigrant airport workers (that is, overstays and illegal border crossers) were arrested or scheduled for deportation, 124 workers, or about 40 percent, were overstays. While both the survey data and the airport data represent rough small- sample checks, they provide some additional support for concluding that overstays are not rare. One weakness in DHS's system for tracking the paper Form I-94--its limited coverage of Mexican and Canadian visitors--was discussed in the section above. In our previous work, we have pointed to at least three other weaknesses in this tracking system: Failure to update the visitor's authorized period of admission or immigration status. We reported earlier this year that DHS does not "consistently enter change of status data . . . integrate these data with those for entry and departure." DHS told us that linkage to obtain updated information may occur for an individual, as when a consular official updates information on an earlier period of admission for someone seeking a new visa, but DHS acknowledged that linkage cannot be achieved broadly to yield an accurate list of visitors who overstayed. Lack of reliable address information and inability to locate visitors. Some visitors do not fill in destination address information on Form I-94 or they do so inadequately. A related issue that we reported in 2002 is DHS's inability to obtain updated address information during each visitor's stay; such information could be a valuable addition to the arrival, departure, and destination address information that is collected. Missing departure forms. We reported in 1995 that "airlines are responsible for collecting . . . departure forms when visitors leave . . . . But for some visitors who may have actually left the United States record of the departures." DHS acknowledges that this is still a concern, that the situation is analogous for cruise lines, and that noncollection is a larger problem for land exits. Our recent work has also drawn attention to identity fraud, demonstrating how persons presenting fraudulent documents (bearing a name other than their own) to DHS inspectors could enter the United States. Visitors whose fraudulent documents pass inspection could record a name other than their own on their I-94 form. In our current work, we have identified two further weaknesses in the tracking system. One weakness is the inability to match some departure forms back to corresponding arrival forms. DHS has suggested that when a visitor loses the original departure form, matching is less certain because it can no longer be based on identical numbers printed on the top and bottom halves of the original form. The other weakness is that at land ports (and possibly airports and seaports), the collection of departure forms is vulnerable to manipulation--in other words, visitors could make it appear that they had left when they had not. To illustrate, on bridges where toll collectors accept I-94 departure forms at the Southwestern border, a person departing the United States by land could hand in someone else's I-94 form. Because of these weaknesses, DHS has no accurate list of overstays to send to consular officials or DHS inspectors. This limits DHS's ability to consider past overstaying when issuing new visas or allowing visitors to reenter. More generally, the lack of an accurate list limits prevention and enforcement options. For example, accurate data on overstays and other visitors might help define patterns to better differentiate visa applicants with higher overstay risk. And without an accurate list and updated addresses, it is not possible to identify and locate new overstays to remind them of penalties for not departing. Such efforts fall under the category of interior enforcement: As we previously testified, "historically . . . over five times more resources in terms of staff and budget border enforcement than . . . interior enforcement." Despite large numbers of overstays, current efforts to deport them are generally limited to (1) criminals and smugglers, (2) employees identified as illegal at critical infrastructure locations, and (3) persons included in special control efforts such as the domestic registration (or "call in" component) of the NSEERS program (the National Security Entry and Exit Registration System). DHS statisticians told us that for fiscal year 2002, the risk of arrest for all overstays was less than 2 percent. For most other overstays (that is, for persons not in the targeted groups), the risk of deportation is considerably lower. The effect of tracking system weaknesses on overstay data is illustrated by the inaccurate--and, according to DHS, inflated--lists of what it terms "apparent overstays" and "confirmed overstays." For fiscal year 2001 arrivals, the system yielded a list of 6.5 million "apparent overstays" for which DHS had no departure record that matched the arrivals and an additional list of a half million "confirmed overstays," or visits that ended after the visitors' initial periods of admission expired (see appendixes I and II). However, DHS has no way of knowing how many of the 6.5 million are real cases of overstaying and how many are false (because some of these visitors had, for example, departed or legally changed their status). Even the half million "confirmed overstays" are not all true cases of overstaying, because some visitors may have legally extended their periods of admission. In the past, we made a number of recommendations that directly or indirectly address some of these system weaknesses, but these recommendations have not been implemented or have been only partially implemented. (Of these, four key recommendations are in appendix III.) DHS has begun two initiatives intended to remedy some of the weaknesses we have discussed. DHS recently began, as part of NSEERS, an effort to register visitors at points of entry (POE) to the United States, conduct intermittent interviews with registered visitors while they are here, and have government inspectors register departures. But the POE effort does not cover most visitors because it focuses on persons born in only eight countries. Moreover, NSEERS procedures do not involve inspectors' observing departures--for example, registration occurs not at airport departure gates but at another location at the airport. Also, inspectors do not generally accompany registrants to observe their boarding. US-VISIT, the U.S. Visitor and Immigrant Status Indicator Technology, is DHS's new tracking system intended to improve entry-exit data. The first phase of US-VISIT, now being rolled out, uses passenger and crew manifest data, as well as biometrics, to verify foreign visitors' identities at airports and seaports. DHS plans three additional phases and will link its data to other systems that contain data about foreign nationals. If successfully designed and implemented, US-VISIT could avoid many of the weaknesses associated with the Form I-94 system. We believe special efforts are needed to ensure US-VISIT's success. DHS concurred with our recent report, pointing to risks and the need for improved management of US-VISIT. For example, we reported that, among other issues, "important aspects defining the program's operating environment are not yet decided facility needs are unclear and challenging." Our recommendations included, among others, that DHS develop acquisition management controls and a risk management plan for US-VISIT, as well as defining performance standards. We also believe that checking US-VISIT's program design against the weaknesses of the Form I-94 system, outlined here, might help in evaluating the program and ensuring its success. Tracking system weaknesses may encourage overstaying on the part of visitors and potential terrorists who legally enter the United States. Once here, terrorists may overstay or use other stratagems--such as exiting and reentering (to obtain a new authorized period of admission) or applying for a change of status--to extend their stay. As shown in table 1, three of the six pilots and apparent leaders were out of status on or before 9/11, two because of short-term overstaying. Additionally, a current overstay recently pled guilty to identity document fraud in connection with the 9/11 hijackers. Two others with a history of overstaying were recently convicted of crimes connected to terrorism (money-laundering and providing material support to terrorists); both had overstayed for long periods. Terrorists who enter as legal visitors are hidden within the much larger populations of all legal visitors, overstays, and other illegals such as border crossers. Improved tracking could help counterterrorism investigators and prosecutors track them and prosecute them, particularly in cases in which suspicious individuals are placed on watch lists after they enter the country. The director of the Foreign Terrorist Tracking Task Force told us that he considered overstay tracking data helpful. For example, these data--together with additional analysis--can be important in quickly and efficiently determining whether suspected terrorists were in the United States at specific times. As we reported earlier this year, between "September 11 and November 9, 2001 , . . . INS compiled a list of aliens whose characteristics were similar to those of the hijackers" in types of visa, countries issuing their passports, and dates of entry into the United States. While the list of aliens was part of an effort to identify and locate specific persons for investigative interviews, it contained duplicate names and data entry errors. In other words, poor data hampered the government's efforts to obtain information in a national emergency, and investigators turned to private sector information. Reporting earlier that INS data "could not be fully relied on to locate many aliens who were of interest to the United States," we had indicated that the Form I-94 system is relevant, stressing the need for improved change-of-address notification requirements. INS generally concurred with our findings. DHS has declared that combating fraudulent employment at critical infrastructures, such as airports, is a priority for domestic security. DHS has planned and ongoing efforts to identify illegal workers in key jobs at various infrastructures (for example, airport workers with security badges). These sweeps are thought to reduce the nation's vulnerability to terrorism, because, as experts have told us, (1) security badges issued on the basis of fraudulent IDs constitute security breaches, and (2) overstays and other illegals working in such facilities might be hesitant to report suspicious activities for fear of drawing authorities' attention to themselves or they might be vulnerable to compromise. Operation Tarmac swept 106 airports and identified 4,271 illegal immigrants who had misused Social Security numbers and identity documents in obtaining airport jobs and security badges. A much smaller number of airport employees had misrepresented their criminal histories in order to obtain their jobs and badges. The illegal immigrant workers with access to secure airport areas were employed by airlines (for example, at Washington Dulles International Airport and Ronald Reagan Washington National Airport, this included American, Atlantic Coast, Delta, Northwest, and United Airlines as well as SwissAir and British Airways) and by a variety of other companies (for example, Federal Express and Ogden Services). Job descriptions included, among others, aircraft maintenance technician, airline agent, airline cabin service attendant, airplane fueler, baggage handler, cargo operations manager, electrician, janitorial supervisor, member of a cleaning crew, predeparture screener, ramp agent, and skycap. In the large majority of these cases, identity fraud or counterfeit IDs were involved; without fraud or counterfeit documents, illegal workers would not have been able to obtain the jobs and badges allowing them access to secure areas. As we discussed earlier in this testimony, when we obtained data on the specific immigration status of workers who were arrested or scheduled for deportation at 14 Operation Tarmac airports, we found that a substantial number were overstays. A DHS official told us that Operation Tarmac is likely not to have identified all illegal aliens working in secure areas of airports. Weaknesses in DHS's current overstay tracking system and the magnitude of the overstay problem make it more difficult to ensure domestic security. DHS has recently initiated two efforts to develop improved systems, but challenges remain. Designing and implementing a viable and effective tracking system is a critical component of the nation's domestic security and continues to be a DHS priority. Viewing our results in the context of our nation's layered defense, we believe that improvements in the tracking system must work together with other factors--such as intelligence, investigation, and information-sharing--to help ensure domestic security. Mr. Chairman, this concludes my statement. I would be happy to respond to any questions that you or other members of the Committee may have. For information regarding this testimony, please contact Nancy R. Kingsbury, Managing Director, Applied Research and Methods, on 202-512-2700. Individuals who made key contributions to this testimony are Donna Heivilin, Judy Droitcour, Daniel Rodriguez, and Eric M. Larson. Annual "overstay cases" (a mixture of real and false cases) Total "overstay cases" for visitors for visitors who arrived by Excludes many Mexicans or Canadians who, visiting for business and pleasure, are exempt from Form I-94 procedures. Most, but not all, visitors from Permanent Visa Waiver countries enter under this program. Visa waiver countries in this tally are Andorra, Australia, Austria, Belgium, Brunei, Denmark, Finland, France, Germany, Iceland, Ireland, Italy, Japan, Liechtenstein, Luxembourg, Monaco, Netherlands, New Zealand, Norway, Portugal, San Marino, Singapore, Slovenia, Spain, Sweden, Switzerland, and United Kingdom. (Excludes Argentina and Uruguay, which were visa waiver countries in fiscal year 2001.) The 25 countries in the NSEERS domestic registration program include (1) 8 countries also subject to point-of-entry (POE) registration (Iran, Iraq, Libya, Pakistan, Saudi Arabia, Sudan, Syria, and Yemen) and (2) 17 other countries (Afghanistan, Algeria, Bahrain, Bangladesh, Egypt, Eritrea, Indonesia, Jordan, Kuwait, Lebanon, Morocco, North Korea, Oman, Qatar, Somalia, Tunisia, and United Arab Emirates). The 123,000 total "overstay cases" (all modes of arrival) from these countries in fiscal year 2001 include approximately 49,000 cases from the countries subject to POE registration and approximately 73,000 cases from the other countries, excluding North Korea. The data exclude North Korea from the NSEERS countries tally because DHS did not provide information separately for North and South Korea. 1. We recommended that to improve the collection of departure forms, the Commissioner of the Immigration and Naturalization Service should ensure that INS examine the quality control of the Nonimmigrant Information System database and determine why departure forms are not being recorded. For example, this could involve examining a sample of the passenger manifest lists of flights with foreign destinations to determine the extent of airline compliance and possibly developing penalties on airlines for noncompliance. Discovery of the incidence of various causes of departure loss could allow more precise estimation of their occurrence and development of possible remedies. (U.S. General Accounting Office, Illegal Aliens: Despite Data Limitations, Current Methods Provide Better Population Estimates, GAO/PEMD-93-25 (Washington, D.C.: Aug. 5, 1993).) INS agreed in principle with our recommendation to study why departure forms are not being collected and subsequently initiated a pilot project that was criticized by the Department of Justice Inspector General and then discontinued. DHS has not told us of any further efforts to study or determine why departure forms are not being collected. 2. We recommended that the Commissioner of INS should have new overstay estimates prepared for air arrivals from all countries, using improved estimation procedures such as those discussed in this report, including, as appropriate, the potential improvements suggested by INS or by reviewers of this report. (U.S. General Accounting Office, Illegal Immigration: INS Overstay Estimation Methods Need Improvement, GAO/PEMD-95-20 (Washington, D.C.: Sept. 26, 1995).) INS initially concurred and produced revised estimates as part of its comments on our report. However, in our response to INS's comments, we described the new estimates as a "first step" and identified concerns about INS's methodological procedures that we said needed further study. DHS told us that it has not further studied making overstay estimates by air arrivals. Valid estimation of overstays is extremely difficult, given current tracking system weaknesses. 3. We recommended that to promote compliance with the change of address notification requirements through publicity and enforcement and to improve the reliability of its alien address data, the Attorney General should direct the INS Commissioner to identify and implement an effective means to publicize the change of address notification requirement nationwide. INS should make sure that, as part of its publicity effort, aliens are provided with information on how to comply with this requirement, including where information may be available and the location of change of address forms. (U.S. General Accounting Office, Homeland Security: INS Cannot Locate Many Aliens because It Lacks Reliable Address Information, GAO-03- 188 (Washington, D.C.: Nov. 21, 2002).) INS/DHS concurred with this recommendation and has identified it as a long-term strategy that will require 2 years to fully implement. It has been less than a year since we made this recommendation, and thus there has not been sufficient time for DHS to implement it fully or for us to review that implementation. 4. We recommended that to provide better information on H-1B workers and their status changes, the Secretary of DHS take actions to ensure that information on prior visa status and occupations for permanent residents and other employment-related visa holders is consistently entered into current tracking systems and that such information become integrated with entry and departure information when planned tracking systems are complete. (U.S. General Accounting Office, H-1B Foreign Workers: Better Tracking Needed to Help Determine H-1B Program's Effects on U.S. Workforce, GAO-03-883 (Washington, D.C.: Sept. 10, 2003).) DHS concurred with this recommendation, made just a month ago. Sufficient time has not elapsed for DHS to implement this recommendation. 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. 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Each year, millions of visitors, foreign students, and immigrants come to the United States. Visitors may enter on a legal temporary basis--that is, with an authorized period of admission that expires on a specific date--either (1) with temporary visas (generally for tourism,business,or work) or, in some cases (2) as tourists or business visitors who are allowed to enter without visas. (The latter group includes Canadians and qualified visitors from 27 countries who enter under the visa waiver program.) The majority of visitors who are tracked depart on time, but others overstay. Four of the 9/11 hijackers who entered the United States with legal visas overstayed their authorized periods of admission. This has heightened attention to issues such as (1) the extent of overstaying, (2) weaknesses in our current overstay tracking system, and (3) how the tracking system weaknesses and the level of overstaying might affect domestic security. Significant numbers of foreign visitors overstay their authorized periods of admission. The Department of Homeland Security estimates the resident overstay population at 2.3 million as of January 2000. Because the starting point for this estimate is the 2000 census, it does not cover short-term overstays who have not established residence here. It also omits an unknown number of potential long-term overstays from Mexico and Canada. Because of unresolved weaknesses in DHS's current system for tracking arrivals and departures (e.g.,noncollection of some departure forms and inability to match other departure forms to arrivals), there is no accurate list of overstays. Two new tracking initiatives are intended to address these weaknesses. NSEERS, the National Security Entry and Exit Registration System, does not cover most visitors. US-VISIT, the U.S. Visitor and Immigrant Status Indicator Technology, a more comprehensive,automated program, is being phased in. While its design and implementation face a number of challenges, evaluating US-VISIT against the weaknesses GAO identifies here would increase its potential for success. The current tracking system's weaknesses limit control options and make it difficult to monitor potential terrorists who enter the country legally. Like other illegal immigrants, overstays obtain jobs with fraudulent identity documents, including jobs at critical infrastructure locations, such as airports. Thus, tracking issues can affect domestic security and are one component of a layered national defense. Improving the tracking system could work with intelligence, investigation, information-sharing, and other factors to help counter threats from foreign terrorists.

Our fiscal year 2007 budget request will provide us the resources necessary to achieve our performance goals in support of the Congress and the American people. This request will allow GAO to improve productivity and maintain progress in technology and other transformation areas. We continue to streamline GAO, modernize our policies and practices, and leverage technology so that we can achieve our mission more effectively and efficiently. These continuing efforts allow us to enhance our performance without significant increases in funding. Our fiscal year 2007 budget request represents a modest increase of about $25 million (or 5 percent) over our fiscal year 2006 revised funding level-- primarily to cover uncontrollable mandatory pay and price level increases. This request reflects a reduction of nearly $5.4 million in nonrecurring fiscal year 2006 costs used to offset the fiscal year 2007 increase. This request also includes about $7 million in one-time fiscal year 2007 costs, which will not recur in fiscal year 2008, to upgrade our business systems and processes. As the Congress addresses the devastation in the Gulf Coast region from Hurricane Katrina and several other major 2005 hurricanes, GAO is supporting the Congress by assessing whether federal programs assisting the people of the Gulf region are efficient and effective and result in a strong return on investment. In order to address the demands of this work; better respond to the increasing number of demands being placed on GAO, including a dramatic increase in health care mandates; and address supply and demand imbalances in our ability to respond to congressional interest in areas such as disaster assistance, homeland security, the global war on terrorism, health care, and forensic auditing, we are seeking your support to provide the funding to rebuild our staffing level to the levels requested in previous years. We believe that 3,267 FTEs is an optimal staffing level for GAO that would allow us to more successfully meet the needs of the Congress. In preparing this request and taking into account the effects of the fiscal year 2006 rescission, we revised our workforce plan to reduce fiscal year 2005 hiring and initiated a voluntary early retirement opportunity for staff in January 2006. These actions better support GAO's strategic plan for serving the Congress, better align GAO's workforce to meet mission needs, correct selected skill imbalances, and allow us to increase the number of new hires later in fiscal year 2006. Our revised hiring plan represents an aggressive hiring level that is significantly higher than in recent fiscal years, and it is the maximum number of staff we could absorb during fiscal year 2006. These actions will also position us to more fully utilize our planned FTE levels of 3,217 and 3,267 in fiscal years 2006 and 2007, respectively. Our fiscal year 2007 budget request includes approximately $502 million in direct appropriations and authority to use about $7 million in estimated revenue from rental income and reimbursable audit work. Table 1 summarizes the changes we are requesting in our fiscal year 2007 budget. Our fiscal year 2007 budget request supports three broad program areas: Human Capital, Engagement Support, and Infrastructure Operations. Consistent with our strategic goal to be a model agency, we have undertaken a number of initiatives to implement performance-based, market-oriented compensation systems; adopt best practices; benchmark service levels and costs; streamline our operations; cross-service and outsource activities; and leverage technology to increase efficiency, productivity, and results. The Human Capital Program provides the resources needed to support a diverse, highly educated, knowledge-based workforce comprising individuals with a broad array of technical and program skills and institutional memory. This workforce represents GAO's human capital-- its greatest asset--and is critical to the agency's success in serving the Congress and the nation. Human Capital Program costs represent nearly 80 percent of our requested budget authority. To further ensure our ability to meet congressional needs, we plan to allocate approximately $17 million for Engagement Support to: conduct travel, a critical tool to accomplish our mission of following the federal dollar cross the country and throughout the world, and to ensure the quality of our work; contract for expert advice and assistance when needed to meet congressional timeframes for a particular audit or engagement; and ensure a limited presence in the Middle East to provide more timely, responsive information on U.S. activities in the area. In addition, we plan to allocate about $91 million--or about 18 percent of our total request--for Infrastructure Operations programs and initiatives to provide the critical infrastructure to support our work. These key activities include information technology, building management, knowledge services, human capital operations, and support services. In fiscal year 2005, the Congress focused its attention on a broad array of challenging issues affecting the safety, health, and well-being of Americans here and abroad, and we were able to provide the objective, fact-based information that decision makers needed to stimulate debate, change laws, and improve federal programs for the betterment of the nation. For example, as the war in Iraq continued, we examined how DOD supplied vehicles, body armor, and other materiel to the troops in the field; contributed to the debate on military compensation; and highlighted the need to improve health, vocational rehabilitation, and employment services for seriously injured soldiers transitioning from the battlefield to civilian life. We kept pace with the Congress's information needs about ways to better protect America from terrorism by issuing products and delivering testimonies that addressed issues such as security gaps in the nation's passport operations that threaten public safety and federal efforts needed to improve the security of checked baggage at airports and cargo containers coming through U.S. ports. We also explored the financial crisis that weakened the airline industry and the impact of this situation on the traveling public and airline employees' pensions. We performed this work in accordance with our strategic plan for serving the Congress, consistent with our professional standards, and guided by our core values (see appendix 1). See table 2 for examples of how GAO assisted the nation in fiscal year 2005. During fiscal year 2005 we monitored our performance using 14 annual performance measures that capture the results of our work; the assistance we provided to the Congress; and our ability to attract, retain, develop, and lead a highly professional workforce (see table 3). For example, in fiscal year 2005 our work generated $39.6 billion in financial benefits, primarily from actions agencies and the Congress took in response to our recommendations. Of this amount, about $19 billion resulted from changes to laws or regulations, $12.8 billion resulted from agency actions based on our recommendations to improve services to the public, and $7.7 billion resulted from improvements to core business processes. See figure 1 for examples of our fiscal year 2005 financial benefits. Many of the benefits that result from our work cannot be measured in dollar terms. During fiscal year 2005, we recorded a total of 1,409 other benefits. For instance, we documented 75 instances where information we provided to the Congress resulted in statutory or regulatory changes, 595 instances where federal agencies improved services to the public, and 739 instances where agencies improved core business processes or governmentwide reforms were advanced. These actions spanned the full spectrum of national issues, from ensuring the safety of commercial airline passengers to identifying abusive tax shelters. See figure 2 for additional examples of GAO's other benefits in fiscal year 2005. One way we measure our effect on improving the government's accountability, operations, and services is by tracking the percentage of recommendations that we made 4 years ago that have since been implemented. At the end of fiscal year 2005, 85 percent of the recommendations we made in fiscal year 2001 had been implemented, primarily by executive branch agencies. Putting these recommendations into practice will generate tangible benefits for the nation over many years. During fiscal year 2005, experts from our staff testified at 179 congressional hearings covering a wide range of complex issues (see table 4). For example, our senior executives testified on improving the security of nuclear material, federal oversight of mutual funds, and the management and control of DOD's excess property. Over 70 of our testimonies were related to high-risk areas and programs (see table 5). Our work is reflected in this law in different ways. In our May 2004 testimony on the use of biometrics for aviation security, we reported on the need to identify how biometrics will be used to improve aviation security prior to making a decision to design, develop, and implement biometrics. Using information from our statement, the House introduced a bill on July 22, 2004, directing the Transportation Security Administration (TSA) to establish system requirements and performance standards for using biometrics, and establish processes to (1) prevent individuals from using assumed identities to enroll in a biometric system and (2) resolve errors. These provisions were later included in an overall aviation security bill and were eventually included in the Intelligence Reform and Terrorism Prevention Act of 2004, enacted in December 2004. We conducted a body of work assessing the physical screening of airport passengers and their checked baggage. We found that the installation of systems that are in line with airport baggage conveyor systems may result in financial benefits, according to TSA estimates for nine airports. We also found that the effectiveness of the advance passenger screening under the process known as Secure Flight was not certain. TSA agreed to take corrective actions in these areas, and the Congress required TSA in the Intelligence Reform and Terrorism Protection Act to prepare a plan and guidelines for installing in-line baggage screening systems, and enacted measures to promote Secure Flight's development and implementation. We reported on the verification of identity documents for drivers' licenses, noting that visual inspection of key documents lent itself to possible identity fraud. To demonstrate this, our investigators were able to obtain licenses in two states using counterfeit documents and the Social Security numbers of deceased persons. The Congress established federal identification standards for state drivers' licenses and other such documents and mandated third-party verification of identity documents presented to apply for a driver's license. We assisted the Congress in crafting major improvements to a program intended to compensate individuals who worked in DOE facilities and developed illnesses related to radiation and hazardous materials exposure. In a 2004 report, we identified features of the originally enacted program that would likely lead to inconsistent benefit outcomes for claimants, in part because the program depended on the varying state workers compensation systems to provide some benefits. We also presented several options for improving the consistency of benefit outcomes and a framework for assessing these options. When the Congress enacted the Ronald W. Reagan National Defense Authorization Act for Fiscal Year 2005, it revamped this energy employees' benefit program. Among other changes, this law federalized the payment of worker compensation benefits for eligible energy contractor employees and provided a schedule of uniform benefit payments. Our work over the past several years has helped the Congress to establish and assess the impacts of the recreational fee demonstration program. Under this trial program, the Congress authorized the National Park Service, the Fish and Wildlife Service, the Bureau of Land Management, and the Forest Service to charge fees to visitors to, among other things, reduce the maintenance backlog at federal parks and historic places and protect these lands from visitor impacts. Since the program's inception in 1996, we have identified issues that needed to be addressed to improve the program's effectiveness that included providing (1) a more permanent source of funds to enhance stability, since the current program had to be reauthorized every 2 years; (2) the participating agencies with greater flexibility in how and where they apply fee revenues; and (3) improvements in interagency coordination in the collection and use of revenue fees to better serve visitors by making the payment of fees more convenient and equitable and reducing visitor confusion about similar or multiple fees being charged at nearby or adjacent federal recreational sites. As a result of this body of work, the Congress addressed these issues by passing the Federal Lands Recreation Enhancement Act in December 2004. This act permits federal land management agencies to continue charging fees at campgrounds, rental cabins, high-impact recreation areas, and day-use sites that have certain facilities. The act also provides for a nationally consistent interagency program, more on-the-ground improvements at recreation sites across the nation, enhanced visitor services, a new national pass for use across interagency federal recreation sites and services, and public involvement in the program. Our work is reflected in this law in different ways. At the time of our August 2003 report, the original 1999 expiration date for the franchise fund pilots operating at the Departments of Commerce, Veterans Affairs, Health and Human Services, the Interior, and the Treasury and at the Environmental Protection Agency had been extended three times. These franchise funds, authorized by the Government Management Reform Act of 1994, are part of a group of 34 intragovernmental revolving funds that were created to provide common administrative support services required by many federal agencies. For example, the Commerce Franchise Fund's business line provides IT infrastructure support services to the agency. We concluded that increasing the period of authorization would help ease concerns of current and potential clients about franchise fund stability and might allow franchise funds to add new business lines, and we suggested that the authorizations be extended for longer periods. The Congress provided permanent authority to the Treasury franchise fund in the Consolidated Appropriations Act, 2005, passed on December 8, 2004. In 2003, we reported that most agencies could not retain the proceeds from the sale of unneeded property and this acted as a disincentive to disposing of unneeded property. We stated in our high- risk report on federal real property that it may make sense to permit agencies to retain proceeds for reinvestment in real property where a need exists. Subsequently, in the Consolidated Appropriations Act, 2005, the Congress authorized the Administrator of GSA to retain the net proceeds from the conveyance of real and related personal property. These proceeds are to be deposited into the Federal Buildings Fund and are to be used as authorized for GSA's real property capital needs. In December 2003, we reported that 184 out of 213 Alaska Native villages are affected, to some extent, by flooding and erosion. However, these villages often have difficulty qualifying for federal assistance to combat their flooding and erosion problems. In our report, we recommended that the Denali Commission adopt a policy to guide investment decisions and project designs in villages affected by flooding and erosion. In this legislation, the Congress provided the Secretary of the Army with the authority to carry out "structural and non-structural projects for storm damage prevention and reduction, coastal erosion, and ice and glacial damage in Alaska, including relocation of affected communities and construction of replacement facilities." To improve the federal government's ability to collect billions of dollars of outstanding criminal debt, we recommended in a 2001 report, that the Department of Justice work with other agencies involved in criminal debt collection, including the Administrative Office of the U.S. Courts, the Department of the Treasury (Treasury), and OMB, to develop a strategic plan that would improve interagency processes and coordination with regard to criminal debt collection activities. The conference report that accompanied the Consolidated Appropriations Act, 2005, directed the Attorney General to assemble an interagency task force for the purposes of better managing, accounting for, reporting, and collecting criminal debt. Our report found that the Department of Education's (Education) system for resolving noncompliance with the Individuals with Disabilities in Education Act is protracted. We found that resolution of noncompliance cases often takes several years, in part because Education took a year on average from the time it identified noncompliance to issue a report citing the noncompliance. We therefore recommended that Education improve its system of resolving noncompliance by shortening the amount of time it takes to issue a report of noncompliance and by tracking changes in response times under the new monitoring process. In response to our recommendation, Education has instituted an improved process for managing and tracking the various phases of the monitoring process, which includes the creation of a database to facilitate this tracking. This new tracking system will enable Education to better monitor the status of existing noncompliance, and thus enable the department to take appropriate action when states fail to come into compliance in a timely manner. In 2004, we found that the 24-hour 1-800-MEDICARE help line, operated by the Centers for Medicare & Medicaid Services (CMS), did not answer 10 percent of the calls we placed to test its accuracy, often because it automatically transferred some calls to claims administration contractors that were not open for business at the time of the call. This call transfer process prohibited callers from accessing information during nonbusiness hours, even though 1-800-MEDICARE operates 24 hours a day. As a result, we recommended that CMS revise the routing procedures of 1-800-MEDICARE to ensure that calls are not transferred or referred to claims administration contractors' help lines during nonbusiness hours. In response, CMS finished converting its call routing procedures. As a result, calls placed after normal business hours will be routed to the main 1-800-MEDICARE help line for assistance. United States Department of Agriculture scientists at the Plum Island Animal Disease Center research contagious animal diseases that have been found in other countries. The mission of the facility, now administered by DHS, is to develop strategies for protecting the nation's animal industries and exports from these foreign animal diseases. In our September 2003 report, Combating Bioterrorism: Actions Needed to Improve Security at Plum Island Animal Disease Center, we made several recommendations to improve security at the facility and reduce vulnerability to terrorist attacks. Among other things, we recommended that the Secretary of Homeland Security, in consultation with the Secretary of Agriculture, enhance incident response capability by increasing the size of the guard force. DHS has informed us that this has been completed. According to the Director of Plum Island, DHS has more than doubled the number of guards assigned on each shift on Plum Island. DOD spending on service contracts approaches $100 billion annually, but DOD's management of services procurement is inefficient and ineffective and the dollars are not always well spent. Many private companies have changed management practices based on analyzing spending patterns and coordinating procurement efforts in order to achieve major savings. We recommended that DOD adopt the effective spend analysis processes used by these leading companies and use technology to automate spend analysis to make it repeatable. In response, DOD is developing new technology to do that. According to DOD and contractor project managers, one phase of the project was completed in December 2004. In March 2005, DOD approved a business case analysis to seek follow-on funding for developing a DOD-wide spend analysis system. As part of our audit of Air Force purchase card controls, we identified transactions that Air Force officials acknowledged to be fraudulent as well as potentially fraudulent transactions that the Air Force had not identified. To improve Air Force oversight of purchase card activity and facilitate the identification of systemic weaknesses and deficiencies in existing internal control and the development of additional control activities, we recommended that the Air Force establish an agencywide database of known purchase card fraud cases. In lieu of establishing a separate agencywide database, during fiscal year 2003, the Air Force Office of Special Investigations initiated quarterly reporting on its purchase card investigations to the DOD IG for macro-level analysis of systemic weaknesses in the program. Our ongoing collaboration with the DOD IG on DOD's purchase card program confirmed that the Air Force's Office of Special Investigations is working effectively with DOD's IG on data-mining techniques for detection of potentially improper and fraudulent purchase card transactions. As a result of our work, the Air Force has taken action to reduce the financial risk associated with undetected fraud and abuse in its purchase card program. For the 2000 Census, the United States Census Bureau (Bureau) printed material used to train census workers only in English, except in Puerto Rico where training materials were available in Spanish. However, to better prepare census workers--some of whom speak Spanish as their first language--to locate migrant farm workers and other hard-to-count groups, we recommended that the Bureau consider providing training materials in languages other than English to targeted areas. In response to our recommendation, the Bureau is researching foreign-language data collection methods as part of its preparations for the 2006 Census test and, more generally, plans to identify areas and operations that will require in-language training materials for areas with very large, new migrant populations where it will not be possible to hire bilinguals. Moreover, the Bureau's June 2005 request for proposals for a Field Data Collection Automation System includes a requirement for the contractor to provide training applications and materials in English and Spanish for the handheld computers enumerators are to use to count nonrespondents. Issued to coincide with the start of each new Congress, our high-risk update, first used in 1993, has helped Members of the Congress who are responsible for oversight and executive branch officials who are accountable for performance. Our high-risk program focuses on major government programs and operations that need urgent attention or transformation to ensure that our government functions in the most economical, efficient, and effective manner possible. Overall, our high-risk program has served to identify and help resolve a range of serious weaknesses that involve substantial resources and provide critical services to the public. Table 5 details our 2005 high-risk list. We are grateful for the Congress's continued support of our joint effort to improve government and for providing the resources that allow us to be a world-class professional services organization. We are proud of the positive impact we have been able to affect in government over the past year and believe an investment in GAO will continue to yield substantial returns for the Congress and the American people. Our nation will continue to face significant challenges in the years ahead. GAO's expertise and involvement in virtually every facet of government positions us to provide the Congress with the timely, objective, and reliable information it needs to discharge its constitutional responsibilities. This concludes my statement. I would be pleased to answer any questions the Members of the Committee may have.

We are pleased to appear before the Congress today in support of the fiscal year 2007 budget request for the U.S. Government Accountability Office (GAO). This request will help us continue our support of the Congress in meeting its constitutional responsibilities and will help improve the performance and ensure the accountability of the federal government for the benefit of the American people. Budget constraints in the federal government grew tighter in fiscal years 2005 and 2006. In developing our fiscal year 2007 budget, we considered those constraints consistent with GAO's and Congress's desire to "lead by example." In fiscal year 2007, we are requesting budget authority of $509.4 million, a reasonable 5 percent increase over our fiscal year 2006 revised funding level. In the event Congress acts to hold federal pay increases to 2.2 percent, our requested increase will drop to below 5 percent. This request will allow us to continue making improvements in productivity, maintain our progress in technology and other transformation areas, and support a full-time equivalent (FTE) staffing level of 3,267. This represents an increase of 50 FTEs over our planned fiscal year 2006 staffing level and will allow us to rebuild our workforce to a level that will position us to better respond to increasing supply and demand imbalances in areas such as disaster assistance, the global war on terrorism, homeland security, forensic auditing, and health care. This testimony focuses on our budget request for fiscal year 2007 to support the Congress and serve the American people and on our performance and results with the funding you provided us in fiscal year 2005. Our fiscal year 2007 budget request will provide us the resources necessary to achieve our performance goals in support of the Congress and the American people. This request will allow GAO to improve productivity and maintain progress in technology and other transformation areas. We continue to streamline GAO, modernize our policies and practices, and leverage technology so that we can achieve our mission more effectively and efficiently. These continuing efforts allow us to enhance our performance without significant increases in funding. Our fiscal year 2007 budget request represents a modest increase of about $25 million (or 5 percent) over our fiscal year 2006 revised funding level--primarily to cover uncontrollable mandatory pay and price level increases. This request reflects a reduction of nearly $5.4 million in nonrecurring fiscal year 2006 costs used to offset the fiscal year 2007 increase. This request also includes about $7 million in one-time fiscal year 2007 costs, which will not recur in fiscal year 2008, to upgrade our business systems and processes. As the Congress addresses the devastation in the Gulf Coast region from Hurricane Katrina and several other major 2005 hurricanes, GAO is supporting the Congress by assessing whether federal programs assisting the people of the Gulf region are efficient and effective and result in a strong return on investment. In order to address the demands of this work; better respond to the increasing number of demands being placed on GAO, including a dramatic increase in health care mandates; and address supply and demand imbalances in our ability to respond to congressional interest in areas such as disaster assistance, homeland security, the global war on terrorism, health care, and forensic auditing, we are seeking Congress's support to provide the funding to rebuild our staffing level to the levels requested in previous years. We believe that 3,267 FTEs is an optimal staffing level for GAO that would allow us to more successfully meet the needs of the Congress. In preparing this request and taking into account the effects of the fiscal year 2006 rescission, we revised our workforce plan to reduce fiscal year 2005 hiring and initiated a voluntary early retirement opportunity for staff in January 2006. These actions better support GAO's strategic plan for serving the Congress, better align GAO's workforce to meet mission needs, correct selected skill imbalances, and allow us to increase the number of new hires later in fiscal year 2006. Our revised hiring plan represents an aggressive hiring level that is significantly higher than in recent fiscal years, and it is the maximum number of staff we could absorb during fiscal year 2006. These actions will also position us to more fully utilize our planned FTE levels of 3,217 and 3,267 in fiscal years 2006 and 2007, respectively.

As defined in a report that we issued in May 2004, data mining is the application of database technology and techniques--such as statistical analysis and modeling--to uncover hidden patterns and subtle relationships in data and to infer rules that allow for the prediction of future results. This definition is based on the most commonly used terms found in a survey of the technical literature. Data mining has been used successfully for a number of years in the private and public sectors in a broad range of applications. In the private sector, these applications include customer relationship management, market research, retail and supply chain analysis, medical analysis and diagnostics, financial analysis, and fraud detection. In the government, data mining has been used to detect financial fraud and abuse. For example, we used data mining to identify fraud and abuse in expedited assistance and other disbursements to Hurricane Katrina victims. Although the characteristics of data mining efforts can vary greatly, data mining generally incorporates three processes: data input, data analysis, and results output. In data input, data are collected in a central data "warehouse," validated, and formatted for use in data mining. In the data analysis phase, data are typically queried to find records that match topics of interest. The two most common types of queries are pattern-based queries and subject-based queries: Pattern-based queries search for data elements that match or depart from a predetermined pattern (e.g., unusual claim patterns in an insurance program). Subject-based queries search for any available information on a predetermined subject using a specific identifier. This could be personal information such as an individual identifier (e.g., an individual's name or Social Security number) or an identifier for a specific object or location. For example, the Navy uses subject-based data mining to identify trends in the failure rate of parts used in its ships. The data analysis phase can be iterative, with the results of one query being used to refine criteria for a subsequent query. The output phase can produce results in printed or electronic format. These reports can be accessed by agency personnel and can also be shared with personnel from other agencies. Figure 1 depicts a generic data mining process. In recent years, data mining has emerged as a prevalent government mechanism for processing and analyzing large amounts of data. In our May 2004 report, we noted that 52 agencies were using or were planning to use data mining in 199 cases, of which 68 were planned, and 131 were operational. Additionally, following the terrorist attacks of September 11, 2001, data mining has been used increasingly as a tool to help detect terrorist threats through the collection and analysis of public and private sector data. This may include tracking terrorist activities, including money transfers and communications, and tracking terrorists themselves through travel and immigration records. According to an August 2006 DHS Office of Inspector General survey of departmental data mining initiatives, DHS is using or developing 12 data mining programs, 9 of which are fully operational and 3 of which are still under development. One such effort is the ADVISE technology program. Managed by the DHS Science and Technology Directorate, the ADVISE program is primarily responsible for (1) continuing to develop the ADVISE data mining tool and (2) promoting and supporting its implementation throughout DHS. According to program officials, it has spent approximately $40 million to develop the tool since 2003. To promote the possible implementation of the tool within DHS component organizations, program officials have made demonstrations (using unclassified data) to interested officials, highlighting the tool's planned capabilities and expected benefits. Program officials have established working relationships with component organizations that are considering adopting the tool, including detailing them staff (typically contractor-provided) to assist in the setup and customization of their ADVISE implementation and providing training for the analysts who are to use it. Program officials project that implementation of the tool at a component organization should generally consist of six main phases and take approximately 12 to 18 months to complete. The six phases are as follows: preparing infrastructure and installing hardware and software; modeling information sources and loading data; verifying and validating that loaded data are accurate and accessible; training and familiarizing analysts and assisting in the development of initial research activities using visualization tools; supporting analysts in identifying the best ways to use ADVISE for their problems, obtaining data, and developing ideas for further improvements; and turning over deployment to the component organizations to maintain the system and its associated data feeds. The program has also provided initial funding for the setup, customization, and pilot testing of implementations within components, under the assumption that when an implementation achieves operational status, the respective component will take over operations and maintenance costs. Program officials estimate that the tool's operations and maintenance costs will be approximately $100,000 per year, per analyst. The program has also offered additional support to components implementing the tool, such as helping them develop privacy compliance documentation. According to DHS officials, the program has spent $12.15 million of its $40 million in support of several pilot projects and test implementations throughout the department. Currently, the department's Interagency Center for Applied Homeland Security Technologies (ICAHST) group within the Science and Technology Directorate is testing the tool's effectiveness, adequacy, and cost- effectiveness as a data mining technology. ICAHST has completed preliminary testing of basic functionality and is currently in the process of testing the system's effectiveness, using mock data to test how well ADVISE identifies specified patterns of interest. The impact of computer systems on the ability of organizations to protect personal information was recognized as early as 1973, when a federal advisory committee on automated personal data systems observed that "The computer enables organizations to enlarge their data processing capacity substantially, while greatly facilitating access to recorded data, both within organizations and across boundaries that separate them." In addition, the committee concluded that "The net effect of computerization is that it is becoming much easier for record-keeping systems to affect people than for people to affect record-keeping systems." In May 2004, we reported that mining government and private databases containing personal information creates a range of privacy concerns. Through data mining, agencies can quickly and efficiently obtain information on individuals or groups by searching large databases containing personal information aggregated from public and private records. Information can be developed about a specific individual or a group of individuals whose behavior or characteristics fit a specific pattern. The ease with which organizations can use automated systems to gather and analyze large amounts of previously isolated information raises concerns about the impact on personal privacy. Further, we reported in August 2005 that although agencies responsible for certain data mining efforts took many of the key steps required by federal law and executive branch guidance for the protection of personal information, none followed all key procedures. Specifically, while three of the four agencies we reviewed had prepared privacy impact assessments (PIA)--assessments of privacy risks associated with information technology used to process personal information--for their data mining systems, none of them had completed a PIA that adequately addressed all applicable statutory requirements. We recommended that four agencies complete or revise PIAs for their systems to fully comply with applicable guidance. As of December 2006, three of the four agencies reported that they had taken action to complete or revise their PIAs. Federal law includes a number of separate statutes that provide privacy protections for information used for specific purposes or maintained by specific types of entities. The major requirements for the protection of personal privacy by federal agencies come from two laws, the Privacy Act of 1974 and the privacy provisions of the E-Government Act of 2002. The Office of Management and Budget (OMB) is tasked with providing guidance to agencies on how to implement the provisions of both laws and has done so, beginning with guidance on the Privacy Act, issued in 1975. The Privacy Act places limitations on agencies' collection, disclosure, and use of personal information maintained in systems of records. The act describes a "record" as any item, collection, or grouping of information about an individual that is maintained by an agency and contains his or her name or another personal identifier. It also defines "system of records" as a group of records under the control of any agency from which information is retrieved by the name of the individual or by an individual identifier. The Privacy Act requires that when agencies establish or make changes to a system of records, they must notify the public through a "system of records notice": that is, a notice in the Federal Register identifying, among other things, the type of data collected, the types of individuals about whom information is collected, the intended "routine" uses of data, and procedures that individuals can use to review and correct personal information. In addition, the act requires agencies to publish in the Federal Register notice of any new or intended use of the information in the system, and provide an opportunity for interested persons to submit written data, views, or arguments to the agency. Several provisions of the act require agencies to define and limit themselves to specific predefined purposes. For example, the act requires that to the greatest extent practicable, personal information should be collected directly from the subject individual when it may affect an individual's rights or benefits under a federal program. The act also requires that an agency inform individuals whom it asks to supply information of (1) the authority for soliciting the information and whether disclosure of such information is mandatory or voluntary; (2) the principal purposes for which the information is intended to be used; (3) the routine uses that may be made of the information; and (4) the effects on the individual, if any, of not providing the information. In addition, the act requires that each agency that maintains a system of records store only such information about an individual as is relevant and necessary to accomplish a purpose of the agency. Agencies are allowed to claim exemptions from some of the provisions of the Privacy Act if the records are used for certain purposes. For example, records compiled for criminal law enforcement purposes can be exempt from a number of provisions, including (1) the requirement to notify individuals of the purposes and uses of the information at the time of collection and (2) the requirement to ensure the accuracy, relevance, timeliness, and completeness of records. In general, the exemptions for law enforcement purposes are intended to prevent the disclosure of information collected as part of an ongoing investigation that could impair the investigation or allow those under investigation to change their behavior or take other actions to escape prosecution. ...information is handled: (i) to ensure handling conforms to applicable legal, regulatory, and policy requirements regarding privacy; (ii) to determine the risks and effects of collecting, maintaining, and disseminating information in identifiable form in an electronic information system; and (iii) to examine and evaluate protections and alternative processes for handling information to mitigate potential privacy risks. Agencies must conduct PIAs before (1) developing or procuring information technology that collects, maintains, or disseminates information that is in a personally identifiable form or (2) initiating any new data collections involving personal information that will be collected, maintained, or disseminated using information technology if the same questions are asked of 10 or more people. OMB guidance also requires agencies to conduct PIAs in two specific types of situations: (1) when, as a result of the adoption or alteration of business processes, government databases holding information in personally identifiable form are merged, centralized, matched with other databases, or otherwise significantly manipulated and (2) when agencies work together on shared functions involving significant new uses or exchanges of information in personally identifiable form. DHS has also developed its own guidance requiring PIAs to be performed when one of its offices is developing or procuring any new technologies or systems, including classified systems, that handle or collect personally identifiable information. It also requires that PIAs be performed before pilot tests are begun for these systems or when significant modifications are made to them. Furthermore, DHS has prescribed detailed requirements for PIAs. For example, PIAs must describe all uses of the information, and whether the system analyzes data in order to identify previously unknown patterns or areas of note or concern. The Privacy Act of 1974 is largely based on a set of internationally recognized principles for protecting the privacy and security of personal information known as the Fair Information Practices. A U.S. government advisory committee first proposed the practices in 1973 to address what it termed a poor level of protection afforded to privacy under contemporary law. The Organization for Economic Cooperation and Development (OECD) developed a revised version of the Fair Information Practices in 1980 that has, with some variation, formed the basis of privacy laws and related policies in many countries, including the United States, Germany, Sweden, Australia, New Zealand, and the European Union. The eight principles of the OECD Fair Information Practices are shown in table 1. The Fair Information Practices are not precise legal requirements. Rather, they provide a framework of principles for balancing the need for privacy with other public policy interests, such as national security, law enforcement, and administrative efficiency. Ways to strike that balance vary among countries and according to the type of information under consideration. ADVISE is a data mining tool under development that is intended to facilitate the analysis of large amounts of data. It is designed to accommodate both structured data (such as information in a database) and unstructured data (such as e-mail texts, reports, and news articles) and to allow an analyst to search for patterns in data, including relationships among entities (such as people, organizations, and events) and to produce visual representations of these patterns, referred to as semantic graphs. Although none are fully operational, DHS's planned uses of this tool include implementations at several departmental components, including Immigration and Customs Enforcement and other components. DHS is also considering further deployments of ADVISE. The intended benefit of the ADVISE tool is to help detect activities that threaten the United States by facilitating the analysis of large amounts of data that otherwise would be prohibitively difficult to review. DHS is currently in the process of testing the tool's effectiveness. ADVISE provides several capabilities that help to find and track relationships in data. These include graphically displaying the results of searches and providing automated alerts when predefined patterns of interest emerge in the data. The tool consists of three main elements--the Information Layer, Knowledge Layer, and Application Layer (depicted in fig. 2). At the Information Layer, disparate data are brought into the tool from various sources. These data sources can be both structured (such as computerized databases and watch lists) and unstructured (such as news feeds and text reports). For structured data, ADVISE contains software applications that load the data into the Information Layer and format it to conform to a specific predefined data structure, known as an ontology. Generally speaking, ontologies define entities (such as a person or place), attributes (such as name and address), and the relationships among them. For unstructured data, ADVISE includes several tools that extract information about entities and attributes. As with structured data, the output of these analyses is formatted and structured according to an ontology. Tagging information as specific entities and attributes is more difficult with unstructured data, and ADVISE includes tools that allow analysts to manually identify entities, attributes, and relationships among them. According to DHS officials, research is continuing on developing efficient and effective mechanisms for inputting different forms of unstructured data. ADVISE can also include information about the data--known as "metadata"--such as the time period to which the data pertain and whether the data refer to a U.S. person. ADVISE metadata also include confidence attributes, ranging from 1 to -1, which represent subjective assessments of the accuracy of the data. Each data source has a predefined confidence attribute. Analysts can change the confidence attribute of specific data, but changes to confidence levels are tracked and linked to the analysts making the changes. At the Knowledge Layer, facts and relationships from the Information Layer are consolidated into a large-scale semantic graph and various subgraphs. Semantic graphing is a data modeling technique that uses a combination of "nodes," representing specific entities, and connecting lines, representing the relationships among them. Because they are well- suited to representing data relationships and linkages, semantic graphs have emerged as a key technology for consolidating and organizing disparate data. Figure 3 represents the format that a typical semantic graph could take. The Knowledge Layer contains the semantic graph of all facts reported through the Information Layer interface and organized according to the ontology. The Knowledge Layer also includes the capability to provide automatic alerts to analysts when patterns of interest (or partial patterns) are matched by new incoming information. At the Application Layer, analysts are able to interact with the data that reside in the Knowledge Layer. The Application Layer contains tools that allow analysts to perform both pattern-based and subject-based queries and to search for data that match a specific pattern, as well as data that are connected with a specific entity. For example, analysts could search for all of the individuals who have traveled to a certain destination within a given period of time, or they could search for all information connected with a particular person, place, or organization. The resulting output of these searches is then graphically displayed via semantic graphs. ADVISE's Application Layer also provides several other capabilities that allow for the further examination and adjustment of its output. An analyst can pinpoint nodes on a semantic graph to view and examine additional information related to them, including the source from which the information and relationships are derived, the data source's confidence level, and whether the data pertain to U.S. persons. The ADVISE Application Layer also provides analysts the ability to monitor patterns of interest in the data. Science and Technology Directorate staff work with component staff to define patterns of interest and build an inventory of automated searches. These patterns are continuously being monitored in the data, and an alert is provided whenever there is a match. For example, an analyst could define a pattern of interest as "all individuals traveling from the United States to the Middle East in the next 6 months" and have the ADVISE tool provide an alert whenever this pattern emerges in the data. The current planned uses of the ADVISE tool include implementations at several DHS components that are planning to use it in a variety of homeland security applications to further their respective organizational missions. Currently none of these implementations is fully operational or widely accessible to DHS analysts. Rather, they are all still in various phases of systems development. These applications are expected to use the tool primarily to help analysts detect threats to the United States, such as identifying activities and/or individuals that could be associated with terrorism. The intended benefit of the ADVISE tool is to consolidate large amounts of structured and unstructured data and permit their analysis and visualization. The tool could thus assist analysts to identify and monitor patterns of interest that could be further investigated and might otherwise have been missed. None of the DHS components have fully implemented the tool in operational systems and, as discussed earlier, testing of the tool is still under way. Until such testing is complete and component implementations are fully operational, the intended benefit remains largely potential. Use of the ADVISE tool raises a number of privacy concerns. DHS has added security controls to the ADVISE tool, including access restrictions, authentication procedures, and security auditing capability. However, it has not assessed privacy risks. Privacy risks that could apply to ADVISE include the potential for erroneous association of individuals with crime or terrorism through data that are not accurate for that purpose, the misidentification of individuals with similar names, and the use of data that were collected for other purposes. A PIA would determine the privacy risks associated with ADVISE and help officials determine what specific controls are needed to mitigate those risks. Although department officials believe a PIA is not needed given that the ADVISE tool itself does not contain personal data, the E-Government Act of 2002 and related federal guidance require the completion of PIAs from the early stages of development. Further, if a PIA were conducted and privacy risks identified, a number of controls exist that could be built into the tool to mitigate those risks. For example, controls could be implemented to ensure that personal information is used only for a specified purpose or compatible purposes, or they could provide the capability to distinguish among individuals that have similar names (a process known as disambiguation) to address the risk of misidentification. Because privacy risks such as these have not been assessed and decisions about mitigating controls have not been made, DHS faces the likelihood that system implementations based on the tool may require costly and potentially duplicative retrofitting at a later date to add the needed controls. Like other data mining applications, the use of the ADVISE tool in conjunction with personal information raises concerns about a number of privacy risks that could potentially have an adverse impact on individuals. As the DHS Privacy Office's July 2006 report on data mining activities notes, "privacy and civil liberties issues potentially arise in every phase of the data mining process." Potential privacy risks can be categorized in relation to the Fair Information Practices, which, as discussed earlier, form the basis for privacy laws such as the Privacy Act. For example, the potential for personal information to be improperly accessed or disclosed relates to the security safeguards principle, which states that personal information should be protected against risks such as loss or unauthorized access, destruction, use, modification, or disclosure. Further, the potential for individuals to be misidentified or erroneously associated with inappropriate activities is inconsistent with the data quality principle that personal data should be accurate, complete, and current, as needed for a given purpose. Similarly, the risk that information could be used beyond the scope originally specified is based on the purpose specification and use limitation principles, which state that, among other things, personal information should only be collected and used for a specific purpose and that such use should be limited to the specified purpose and compatible purposes. Like other data mining applications, the ADVISE tool could misidentify or erroneously associate an individual with undesirable activity such as fraud, crime, or terrorism--a result known as a false positive. False positives may be the result of poor data quality, or they could result from the inability of the system to distinguish among individuals with similar names. Data quality, the principle that data should be accurate, current, and complete as needed for a given purpose, could be particularly difficult to ensure with regard to ADVISE because the tool brings together multiple, disparate data sources, some of which may be more accurate for the analytical purpose at hand than others. If data being analyzed by the tool were never intended for such a purpose or are not accurate for that purpose, then conclusions drawn from such an analysis would also be erroneous. Another privacy risk is the potential for use of the tool to extend beyond the scope of what it was originally designed to address, a phenomenon commonly referred to as function or mission "creep." Because it can facilitate a broad range of potential queries and analyses and aggregate large quantities of previously isolated pieces of information, ADVISE could produce aggregated, organized information that organizations could be tempted to use for purposes beyond that which was originally specified when the information was collected. The risks associated with mission creep are relevant to the purpose specification and use limitation principles. To address security, DHS has included several types of controls in ADVISE. These include authentication procedures, access controls, and security auditing capability. For example, an analyst must provide a valid user name and password in order to gain access to the tool. Further, upon gaining access, only users with appropriate security clearances may view sensitive data sets. Each service requested by a user--such as issuing a query or retrieving a document--is checked against the user's credentials and access authorization before it is provided. In addition, these user requests and the tool's responses to them are all recorded in an audit log. While inclusion of controls such as these is a key step in guarding against unauthorized access, use, disclosure, or modification, such controls alone do not address the full range of potential privacy risks. The need to evaluate such risks early in the development of information technology is consistently reflected in both law (the E-Government Act of 2002) and related federal guidance. The E-Government Act requires that a PIA be performed before an agency develops or procures information technology that collects, maintains, or disseminates information in a personally identifiable form. Further, both OMB and DHS PIA guidance emphasize the need to assess privacy risks from the early stages of development. However, although DHS officials are considering performing a PIA, no PIA or other privacy risk assessment has yet been conducted. The DHS Privacy Office instructed the Science and Technology Directorate that a PIA was not required because the tool alone did not contain personal data. According to the Privacy Office rationale, only specific system implementations based on ADVISE that contained personal data would likely require PIAs, and only at the time they first began to use such data. However, guidance on conducting PIAs makes it clear that they should be performed at the early stages of development. OMB's PIA guidance requires PIAs at the IT development stage, stating that they "should address the impact the system will have on an individual's privacy, specifically identifying and evaluating potential threats relating to elements identified [such as the nature, source, and intended uses of the information] to the extent these elements are known at the initial stages of development." Regarding ADVISE, the tool's intended uses include applications containing personal information. Thus the requirement to conduct a PIA from the early stages of development applies. As of November 2006, the ADVISE program office and DHS Privacy Office were in discussions regarding the possibility of conducting a privacy assessment similar to a PIA but modified to address the development of a technological tool. No final decision has yet been made on whether or how to proceed with a PIA. However, until such an assessment is performed, DHS cannot be assured that privacy risks have been identified or will be mitigated for system implementations based on the tool. A variety of privacy controls can be built into data mining software applications, including the ADVISE tool, to help mitigate risks identified in PIAs and protect the privacy of individuals whose information may be processed. DHS has recognized the importance of implementing such privacy protections when data mining applications are being developed. Specifically, in its July 2006 report, the DHS Privacy Office recommended instituting controls for data mining activities that go beyond conducting PIAs and implementing standard security controls. Such measures could be applied to the development of the ADVISE tool. Among other things, the DHS Privacy Office recommended that DHS components use data mining tools principally as investigative tools and not as a means of making automated decisions regarding individuals. The report also emphasizes that data mining should produce accurate results and recommends that DHS adopt data quality standards for data used in data mining. Further, the report recommends that data mining projects give explicit consideration to using anonymized data when personally identifiable information is involved. Although some of the report's recommendations may apply only to operational data mining activities, many reflect system functionalities that can be addressed during technology development. Based on privacy risks identified in a PIA, controls exist that could be implemented in ADVISE to mitigate those risks. For example, controls could be implemented to enforce use limitations associated with the purpose specified when the data were originally collected. Specifically, software controls could be implemented that require an analyst to specify an allowable purpose and check that purpose against the specified purposes of the databases being accessed. Regarding data quality risks, the ADVISE tool currently does not have the capability to distinguish among individuals with similar identifying information, nor does it have a mechanism to assess the accuracy of the relationships it uncovers. To address the risk of misidentification, software could be added to the tool to distinguish among individuals that have similar names, a process known as disambiguation. Disambiguation tools have been developed for other applications. Additionally, although the ADVISE tool includes a feature that allows analysts to designate confidence levels for individual pieces of data, no mechanism has been developed to assess the confidence of relationships identified by the tool. While software specifically to determine data quality would be difficult to develop, other controls exist that could be readily used as part of a strategy for mitigating this risk. For example, anonymization could be used to minimize the exposure of personal data, and operational procedures could be developed to restrict the use of analytical results containing personal information that could have data quality concerns. To implement anonymization, the tool would need the software capability to handle anonymized data or have a built-in data anonymizer. DHS currently does not have plans to build anonymization into the ADVISE tool. Until a PIA that identifies the privacy risks of ADVISE is conducted and privacy controls to mitigate those risks are implemented, DHS faces the risk that privacy concerns will arise during implementation of systems based on ADVISE that may be more difficult to address at that stage and possibly require costly retrofitting. The ADVISE tool is intended to provide the capability to ingest large amounts of data from multiple sources and to display relationships that can be discerned within the data. Although the ADVISE tool has not yet been fully implemented and its effectiveness is still being evaluated, the chief intended benefit is to help detect activities threatening to the United States by facilitating the analysis of large amounts of data. The ADVISE tool incorporates security controls intended to protect the information it processes from unauthorized access. However, because ADVISE is intended to be used in ways that are likely to involve personal data, a range of potential privacy risks could be involved in its operational use. Thus, it is important that those risks be assessed--through a PIA--so that additional controls can be established to mitigate them. However, DHS has not yet conducted a PIA, despite the fact that the E-Government Act and related OMB and DHS guidance emphasize the need to assess privacy risks early in systems development. Although DHS officials stated that they believe a PIA is not required because the tool alone does not contain personal data, they also told us they are considering conducting a modified PIA for the tool. Until a PIA is conducted, little assurance exists that privacy risks have been rigorously considered and mitigating controls established. If controls are not addressed now, they may be more difficult and costly to retrofit at a later stage. To ensure that privacy protections are in place before DHS proceeds with implementations of systems based on ADVISE, we recommend that the Secretary of Homeland Security take the following two actions: immediately conduct a privacy impact assessment of the ADVISE tool to identify privacy risks, such as those described in this report, and implement privacy controls to mitigate potential privacy risks identified in the PIA. We received oral and written comments on a draft of this report from the DHS Departmental GAO/Office of Inspector General Liaison Office. (Written comments are reproduced in appendix II.) DHS officials generally agreed with the content of this report and described actions initiated to address our recommendations. DHS also provided technical comments, which have been incorporated in the final report as appropriate. In its comments DHS emphasized the fact that the ADVISE tool itself does not contain personal data and that each deployment of the tool will be reviewed through the department's privacy compliance process, including, as applicable, development of a PIA and a system of records notice. DHS further stated that it is currently developing a "Privacy Technology Implementation Guide" to be used to conduct a PIA for ADVISE. Although we have not reviewed the guide, it appears to be a positive step toward developing a PIA process to address technology tools such as ADVISE. It is not clear from the department's response whether the privacy controls identified based on applying the Privacy Technology Implementation Guide to ADVISE are to be incorporated into the tool itself. We believe that any controls identified by a PIA to mitigate privacy risks should be implemented, to the extent possible, in the tool itself. Specific development efforts that use the tool will then have these integrated controls readily available, thus reducing the potential for added costs and technical risks. The department also requested that we change the wording of our recommendation; however, we have retained the wording in our draft report because it clearly emphasizes the need to incorporate privacy controls into the ADVISE tool itself. As agreed with your office, unless you publicly announce the contents of this report earlier, we plan no further distribution until 30 days from the report date. At that time, we will send copies of this report to the Secretary of Homeland Security and other interested congressional committees. Copies will be made available to others on request. In addition, this report will be available at no charge on our Web site at www.gao.gov. If you have any questions concerning this report, please call me at (202) 512-6240 or send e-mail to [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. Our objectives were to determine the following: the planned capabilities, uses, and associated benefits of the Analysis Dissemination, Visualization, Insight, and Semantic Enhancement (ADVISE) tool and whether potential privacy issues could arise from using the ADVISE tool to process personal information and how the Department of Homeland Security (DHS) has addressed any such issues. To address our first objective, we identified and analyzed the tool's capabilities, planned uses, and associated benefits. We reviewed program documentation, including annual program execution plans, and interviewed agency officials responsible for managing and implementing the program, including officials from the DHS Science and Technology Directorate and the Lawrence Livermore and Pacific Northwest National Laboratories. We also viewed a demonstration of the tool's semantic graphing capability. In addition, we interviewed officials at DHS components to identify their current or planned uses of ADVISE, the progress of their implementations, and the benefits they hope to gain from using the tool. These components included Immigrations and Customs Enforcement and other components. We also interviewed officials from the Interagency Center of Applied Homeland Security Technology (ICAHST), who are responsible for conducting testing of the tool's capabilities. We also visited ICAHST at the John Hopkins Applied Physics Laboratory in Laurel, Maryland, to view a demonstration of its testing activities. We did not conduct work or review implementations of ADVISE at the DHS Office of Intelligence and Analysis. To address our second objective, we identified potential privacy concerns that could arise from using the ADVISE tool by reviewing relevant reports, including prior GAO reports and the DHS Privacy Office 2006 report on data mining. We identified and analyzed DHS actions to comply with the Privacy Act of 1974 and the E-Government Act of 2002. We interviewed technical experts within the DHS Science and Technology Directorate and personnel responsible for implementing ADVISE at DHS components to assess privacy controls included in the ADVISE tool. We also interviewed officials from the DHS Privacy Office. We performed our work from June 2006 to December 2006 in the Washington, D.C., metropolitan area. Our work was performed in accordance with generally accepted government auditing standards. In addition to the individual named above, John de Ferrari, Assistant Director; Idris Adjerid; Nabajyoti Barkakati; Barbara Collier; David Plocher; and Jamie Pressman made key contributions to this report.

The government's interest in using technology to detect terrorism and other threats has led to increased use of data mining. A technique for extracting useful information from large volumes of data, data mining offers potential benefits but also raises privacy concerns when the data include personal information. GAO was asked to review the development by the Department of Homeland Security (DHS) of a data mining tool known as ADVISE (Analysis, Dissemination, Visualization, Insight, and Semantic Enhancement). Specifically, GAO was asked to determine (1) the tool's planned capabilities, uses, and associated benefits and (2) whether potential privacy issues could arise from using it to process personal information and how DHS has addressed any such issues. GAO reviewed program documentation and discussed these issues with DHS officials. ADVISE is a data mining tool under development intended to help DHS analyze large amounts of information. It is designed to allow an analyst to search for patterns in data--such as relationships among people, organizations, and events--and to produce visual representations of these patterns, referred to as semantic graphs. None of the three planned DHS implementations of ADVISE that GAO reviewed are fully operational. (GAO did not review uses of the tool by the DHS Office of Intelligence and Analysis.) The intended benefit of the ADVISE tool is to help detect threatening activities by facilitating the analysis of large amounts of data. DHS is currently in the process of testing the tool's effectiveness. Use of the ADVISE tool raises a number of privacy concerns. DHS has added security controls to the tool; however, it has not assessed privacy risks. Privacy risks that could apply to ADVISE include the potential for erroneous association of individuals with crime or terrorism and the misidentification of individuals with similar names. A privacy impact assessment would identify specific privacy risks and help officials determine what controls are needed to mitigate those risks. ADVISE has not undergone such an assessment because DHS officials believe it is not needed given that the tool itself does not contain personal data. However, the tool's intended uses include applications involving personal data, and the E-Government Act and related guidance emphasize the need to assess privacy risks early in systems development. Further, if an assessment were conducted and privacy risks identified, a number of controls could be built into the tool to mitigate those risks. For example, controls could be implemented to ensure that personal information is used only for a specified purpose or compatible purposes, and they could provide the capability to distinguish among individuals that have similar names to address the risk of misidentification. Because privacy has not been assessed and mitigating controls have not been implemented, DHS faces the risk that ADVISE-based system implementations containing personal information may require costly and potentially duplicative retrofitting at a later date to add the needed controls.

The South Florida ecosystem encompasses a broad range of natural, urban, and agricultural areas surrounding the remnant Everglades. Before human intervention, freshwater in the ecosystem flowed south from Lake Okeechobee to Florida Bay in a broad, slow-moving sheet, creating the mix of wetlands that form the ecosystem. These wetlands, interspersed with dry areas, created habitat for abundant wildlife, fish, and birds. The South Florida ecosystem is also home to 6.5 million people and supports a large agricultural, tourist, and industrial economy. To facilitate development in the area, in 1948, Congress authorized the U.S. Army Corps of Engineers to build the Central and Southern Florida Project--a system of more than 1,700 miles of canals and levees and 16 major pump stations--to prevent flooding and intrusion of saltwater into freshwater aquifers on the Atlantic coast. The engineering changes that resulted from the project, and subsequent agricultural, industrial, and urban development, reduced the Everglades ecosystem to about half its original size, causing detrimental effects to fish, bird, and other wildlife habitats and to water quality. Figure 1 shows the historic and current flows of the Everglades ecosystem as well as the proposed restored flow. Efforts to reverse the detrimental effects of development on the ecosystem led to the formal establishment of the Task Force, authorized by the Water Resources Development Act (WRDA) of 1996. The Task Force, charged with coordinating and facilitating the restoration of the ecosystem, established three overall goals to: Get the water right: restore more natural hydrologic functions to the ecosystem while providing adequate water supplies and flood control. The goal is to deliver the right amount of water, of the right quality, to the right places at the right times. Restore, protect, and preserve the natural system: restore lost and altered habitats and change current land use patterns. Growth and development have displaced and disconnected natural habitats and the spread of invasive species has caused sharp declines in native plant and animal populations. Foster the compatibility of the built and natural systems: find development patterns that are complementary to ecosystem restoration and to a restored natural system. Figure 2 shows the relationship of the agencies participating in restoration, the Task Force, and the three restoration goals. Because of the complexity of the ecosystem and efforts underway to restore it, and the urgency to begin the long-term ecosystem restoration effort, not all of the scientific information that is needed is available to make restoration decisions. As a result, scientists will continually need to develop information and restoration decision makers will continually need to review it. According to the Task Force, scientists participating in restoration are expected to identify and determine what information is needed to fill gaps in scientific knowledge critical to meeting restoration objectives and provide managers with updated scientific information for critical restoration decisions. Generally, decisions about restoration projects and plans have been--and will continue to be--made by the agencies participating in the restoration initiative. To provide agency managers and the Task Force with updated scientific information, the Task Force has endorsed adaptive management, a process that requires key tools, such as models, continued research, and monitoring plans. Federal and state agencies spent $576 million from fiscal years 1993 through 2002 to conduct mission-related scientific research, monitoring, and assessment in support of the restoration of the South Florida ecosystem. Eight federal departments and agencies spent $273 million for scientific activities, with the Department of the Interior spending $139 million (about half) of the funds. The level of federal expenditures, which increased by over 50 percent in 1997, has since remained relatively constant. The South Florida Water Management District--the state agency most heavily involved in scientific activities for restoration--spent $303 million from 1993 through 2002. The District's expenditures have increased steadily since 1993, with significant increases in 2000 and 2002. Figure 3 shows the total federal and state expenditures for scientific activities related to restoration over the last decade. Eight federal agencies are involved in scientific activities for the restoration: the Department of the Interior's U.S. Geological Survey, National Park Service, Fish and Wildlife Service, and Bureau of Indian Affairs; the Department of Commerce's National Oceanic and Atmospheric Administration; the Department of Agriculture's Agricultural Research Service; the U.S. Army Corps of Engineers; and the Environmental Protection Agency. Within the Department of the Interior, four agencies spent $139 million on scientific activities. The U.S. Geological Survey spent over half of the Interior funding, or $77 million, primarily on its Placed-Based Studies Program, which provides information, data, and models to other agencies to support decisions for ecosystem restoration and management. The National Park Service spent about $48 million for the Critical Ecosystem Studies Initiative (CESI), a program begun in 1997 to accelerate research to provide scientific information for the restoration initiative. The National Park Service used CESI funding to support research (1) to characterize the ecosystem's predrainage and current conditions and (2) to identify indicators for monitoring the success of restoration in Everglades National Park, other parks, and public lands and to develop models and tools to assess the effects of water projects on these natural lands. Of the remaining Interior funding, the Fish and Wildlife Service and the Bureau of Indian Affairs spent $10 million and $3 million, respectively. Four agencies spent the other federal funds--$134 million. The Corps of Engineers and the National Oceanic and Atmospheric Administration spent approximately $37 million each, primarily on research activities. Two other federal agencies--the Agricultural Research Service and the Environmental Protection Agency--spent the remaining $60 million in federal funds. In addition to the $273 million spent by federal agencies, the State of Florida's South Florida Water Management District provided $303 million for such activities from 1993 to 2002. The District spent much of its funding on scientific activities related to water projects in line with its major responsibility to manage and operate the Central and Southern Florida Project and water resources in the ecosystem. With these federal and state expenditures, scientists have made some progress in developing scientific information and adaptive management tools. In particular, scientists now better understand the historic and current hydrological conditions in the ecosystem and developed models that allow them to forecast the effects of water management alternatives on the ecosystem. Scientists also made significant progress in developing information on the sources, transformations, and fate of mercury--a contaminant that affects water quality and the health of birds, animals, and humans--in the South Florida ecosystem. Specifically, scientists determined that atmospheric sources account for greater than 95 percent of the mercury that is added to the ecosystem. In addition, scientists made progress in developing (1) a method that uses a natural predator to control Melaleuca, an invasive species, and (2) techniques to reduce high levels of nutrients--primarily phosphorus--in the ecosystem. While scientists made progress in developing scientific information, they also identified significant gaps in scientific information and adaptive management tools that, if not addressed in the near future, will hinder the overall success of the restoration effort. We reviewed 10 critical restoration projects and plans and discussed the scientific information needs remaining for these projects with scientists and project managers. On the basis of our review, we identified three types of gaps in scientific information: (1) gaps that threaten systemwide restoration if they are not addressed; (2) gaps that threaten the success of particular restoration projects if they are not addressed; and (3) gaps in information and tools that will prevent restoration officials from using adaptive management to pursue restoration goals. An example of a gap that could hinder systemwide restoration is information on contaminants, such as fertilizers and pesticides. Scientists are concerned that the heavy use of fertilizers and pesticides--which are transported by water and soil and are deposited in sediments--near natural areas in South Florida increases the discharge of chemical compounds into these areas. Contaminants are absorbed by organisms such as aquatic insects, other invertebrates, and fish that live in the water and sediment, affecting the survival and reproduction of these organisms and those that feed on them. Scientists need information on the amount of contaminants that could be discharged into the environment, the amounts that persist in water and sediment, and the risks faced by organisms living in areas with contaminants--even low levels of contaminants on a long- term basis. If this information is not available, scientists cannot determine whether contaminants harm fish and other organisms or whether the redistribution of water will introduce potentially harmful contaminants to parts of the ecosystem that are relatively undisturbed. An example of a gap that could hinder the progress of a specific project is information needed to complete the Modified Water Delivery project, which has been ongoing for many years and has been delayed primarily because of land acquisition conflicts. The Modified Water Delivery project and a related project in the Comprehensive Everglades Restoration Plan are expected, among other purposes, to increase the amount of water running through the eastern part of Everglades National Park and restore the "ridge and slough" habitat. However, scientists identified the need for continued work to understand the role of flowing water in the creation of ridge and slough habitat. If the information is not developed, the project designs may be delayed or inadequate, forcing scientists and project managers to spend time redesigning projects or making unnecessary modifications to those already built. An example of a gap in key tools needed for adaptive management is the lack of mathematical models that would allow scientists to simulate aspects of the ecosystem and better understand how the ecosystem responds to restoration actions. Scientists identified the need for several important models including models for Florida Bay, Biscayne Bay, and systemwide vegetation. Without such tools, the process of adaptive management will be hindered because scientists and managers will be less able to monitor and assess key indicators of restoration and evaluate the effects created by particular restoration actions. The Water Resources Development Act of 1996 requires the Task Force to coordinate scientific research for South Florida restoration; however, the Task Force has not established an effective means to do so, diminishing assurance that key scientific information will be developed and available to fill gaps and support restoration decisions. The SCT's main responsibilities are planning scientific activities for restoration, ensuring the development of a monitoring plan, synthesizing scientific information, and conducting science conferences and workshops on major issues such as invasive species and sustainable agriculture. As the restoration has proceeded, other groups have been created to manage scientific activities and information for particular programs or issues, but these groups are more narrowly focused than the SCT. These groups and a more detailed discussion of their individual purposes appear in appendix I. Although the Task Force created the SCT as a science coordination group, it established the group with several organizational limitations, contributing to the SCT's inability to accomplish several important functions. Specifically, the Task Force did not: Provide specific planning requirements, including requirements for a science plan or comprehensive monitoring plan. A science plan would (1) facilitate coordination of the multiple agency science plans and programs, (2) identify key gaps in scientific information and tools, (3) prioritize scientific activities needed to fill such gaps, and (4) recommend agencies with expertise to fund and conduct work to fill these gaps. In addition, a comprehensive monitoring plan would support the evaluation of restoration activities. This plan would identify measures and indicators of a restored ecosystem--for all three goals of restoration--and would provide scientists with a key tool to implement adaptive management. Establish processes that (1) provide management input for science planning and (2) identify and prioritize scientific issues for the SCT to address in its synthesis reports. Scientists and managers have both noted the need for an effective process that allows the Task Force to identify significant restoration management issues or questions that scientific activities need to address. In addition, a process used to select issues for synthesis reports needs to be transparent to members of the SCT and the Task Force and needs to facilitate the provision of a credible list of issues that the SCT needs to address in its synthesis reports. One way that other scientific groups involved in restoration efforts, such as the Chesapeake Bay effort, address transparency and credibility is the use an advisory board to provide an independent review of the scientific plans, reports, and issues. Provide resources for carrying out its responsibilities. Only two agencies--the U.S. Geological Survey and the South Florida Water Management District--have allocated some staff time for SCT duties. In comparison, leaders of other large ecosystem restoration efforts--the San Francisco Bay and Chesapeake Bay area efforts--have recognized that significant resources are required to coordinate science for such efforts. These scientists and managers stated that their coordination groups have full-time leadership (an executive director or chief scientist), several full- time staff to coordinate agencies' science efforts and develop plans and reports, and administrative staff to support functions. To improve the coordination of scientific activities for the South Florida ecosystem restoration initiative, we recommended in our report--released today--that the Secretary of the Interior, as chair of the Task Force, take several actions to strengthen the SCT. First, the plans and documents to be produced by the SCT should be specified, along with time frames for completing them. Second, a process should be established to provide Task Force input into planning for scientific activities. Third, a process--such as independent advisory board review--should be established to prioritize the issues requiring synthesis of scientific information. Finally, an assessment of the SCT's resource needs should be made and sufficient staff resources should be allocated to SCT efforts. In commenting on a draft of our report, the Department of the Interior agreed with the premises of our report that scientific activities for restoration need to be better coordinated and the SCT's responsibilities need to be clarified. However, Interior noted that the Task Force itself will ultimately need to agree on the actions necessary to strengthen the SCT. Although Interior agreed to coordinate the comments of the Task Force agencies, it could not do so because this would require the public disclosure of the draft report. Mr. Chairman, this concludes my formal statement. If you or other Members of the Subcommittee have any questions, I will be pleased to answer them. For further information on this testimony, please contact Barry T. Hill at (202) 512-3841. Individuals making key contributions to this testimony included Susan Iott, Chet Janik, Beverly Peterson, and Shelby Stephan. The South Florida Ecosystem Restoration Task Force (Task Force) and participating agencies have created several groups with responsibilities for various scientific activities. One of these teams--the Science Coordination Team (SCT) created by the Task Force--is the only group responsible for coordinating restoration science activities that relate to all three of the Task Force's restoration goals (see fig. 4). Other teams that have been created with responsibility for scientific activities include the Restoration Coordination and Verification (RECOVER) program teams, the Multi-Species Ecosystem Recovery Implementation Team, the Noxious Exotic Weed Task Team, and the Committee on Restoration of the Greater Everglades Ecosystem (CROGEE). As shown in figure 4, each of these teams is responsible for scientific activities related to specific aspects of restoration.

Restoration of the South Florida ecosystem is a complex, long-term federal and state undertaking that requires the development of extensive scientific information. GAO was asked to report on the funds spent on scientific activities for restoration, the gaps that exist in scientific information, and the extent to which scientific activities are being coordinated. From fiscal years 1993 through 2002, eight federal agencies and one state agency collectively spent $576 million to conduct mission-related scientific research, monitoring, and assessment in support of the restoration of the South Florida ecosystem. With this funding, which was almost evenly split between the federal agencies and the state agency, scientists have made progress in developing information--including information on the past, present, and future flow of water in the ecosystem--for restoration. While some scientific information has been obtained and understanding of the ecosystem improved, key gaps remain in scientific information needed for restoration. If not addressed quickly, these gaps could hinder the success of restoration. One particularly important gap is the lack of information regarding the amount and risk of contaminants, such as fertilizers and pesticides, in water and sediment throughout the ecosystem. The South Florida Ecosystem Restoration Task Force--comprised of federal, state, local, and tribal entities--is responsible for coordinating the South Florida ecosystem restoration initiative. The Task Force is also responsible for coordinating scientific activities for restoration, but has yet to establish an effective means of doing so. In 1997, it created the Science Coordination Team (SCT) to coordinate the science activities of the many agencies participating in restoration. However, the Task Force did not give the SCT clear direction to carry out its responsibilities in support of the Task Force and restoration. Furthermore, unlike the full-time science coordinating bodies created for other restoration efforts, the SCT functions as a voluntary group with no full-time and few part-time staff. Without an effective means to coordinate restoration, the Task Force cannot ensure that restoration decisions are based on sound scientific information.

FPS assesses risk and recommends countermeasures to GSA and tenant agencies; however, FPS's ability to use risk management to influence the allocation of resources is limited because resource allocation decisions are the responsibility of GSA and tenant agencies--in the form of Facility Security Committees (FSC)--who have at times been unwilling to fund the countermeasures FPS recommends. We have found that, under the current risk management approach, the security equipment that FPS recommends and is responsible for acquiring, installing, and maintaining may not be implemented for several reasons including the following: tenant agencies may not have the security expertise needed to make risk- based decisions, tenant agencies may find the associated costs prohibitive, the timing of the assessment process may be inconsistent with tenant agencies' budget cycles, consensus may be difficult to build amount multiple tenant agencies, or tenant agencies may lack a complete understanding of why recommended countermeasures are necessary because they do not receive security assessments in their entirety. For example, in August 2007, FPS recommended a security equipment countermeasure--the upgrade of a surveillance system shared by two high-security locations that, according to FPS officials, would cost around $650,000. While members of one FSC told us they approved spending between $350,000 and $375,000 to fund their agencies' share of the countermeasure, they said that the FSC of the other location would not approve funding; therefore, FPS could not upgrade the system as it had recommended. In November 2008, FPS officials told us that they were moving ahead with the project by drawing on unexpended revenues from the two locations' building-specific fees as well as the funding that was approved by one of the FSCs. Furthermore, FPS officials, in May 2009, told us that all cameras had been repaired, and all monitoring and recording devices had been replaced, and that the two FSCs had approved additional upgrades, which FPS was implementing. As we reported in June 2008, we have found other instances in which recommended security countermeasures were not implemented at some of the buildings we visited because FSC members could not agree on which countermeasures to implement or were unable to obtain funding from their agencies. Currently no guidelines exist outlining the requirements for FSCs including their composition, requirements, and relationship with FPS. The Interagency Security Committee (ISC), which is chaired within NPPD, recently began to develop guidance for FSC operations, which may address some of these issues. The ISC, however, has yet to announce an anticipated date for issuance of this guidance. Compounding this situation, FPS takes a building-by-building approach to risk management, using an outdated risk assessment tool to create facility security assessments (FSA), rather than taking a more comprehensive, strategic approach and assessing risks among all buildings in GSA's inventory and recommending countermeasure priorities to GSA and tenant agencies. As a result, the current approach provides less assurance that the most critical risks at federal buildings across the country are being prioritized and mitigated. Also, GSA and tenant agencies have concerns about the quality and timeliness of FPS's risk assessment services and are taking steps to obtain their own risk assessments. For example, GSA officials told us they have had difficulties receiving timely risk assessments from FPS for space GSA is considering leasing. These risk assessments must be completed before GSA can take possession of the property and lease it to tenant agencies. An inefficient risk assessment process for new lease projects can add to costs for GSA and create problems for both GSA and tenant agencies that have been planning for a move. Therefore, GSA is updating a risk assessment tool that it began developing in 1998, but has not recently used, to better ensure the timeliness and comprehensiveness of these risk assessments. GSA officials told us that, in the future, they may use this tool for other physical security activities, such as conducting other types of risk assessments and determining security countermeasures for new facilities. Additionally, although tenant agencies have typically taken responsibility for assessing risk and securing the interior of their buildings, assessing exterior risks requires additional expertise and resources. This is an inefficient approach considering that tenant agencies are paying FPS to assess building security. While FPS is currently operating at its congressionally mandated staffing level of no fewer than 1,200 full-time employees, FPS has experienced difficulty determining its optimal staffing level to protect federal facilities. Prior to this mandate, FPS's staff was steadily declining and, as a result, critical law enforcement services have been reduced or eliminated. For example, FPS has largely eliminated its use of proactive patrol to prevent or detect criminal violations at many GSA buildings. According to some FPS officials at regions we visited, not providing proactive patrol has limited its law enforcement personnel to a reactive force. Additionally, officials stated that, in the past, proactive patrol permitted its police officers and inspectors to identify and apprehend individuals that were surveilling GSA buildings. In contrast, when FPS is not able to patrol federal buildings, there is increased potential for illegal entry and other criminal activity. In one city we visited, a deceased individual had been found in a vacant GSA facility that was not regularly patrolled by FPS. FPS officials stated that the deceased individual had been inside the building for approximately 3 months. In addition to the elimination of proactive patrol, many FPS regions have reduced their hours of operation for providing law enforcement services in multiple locations, which has resulted in a lack of coverage when most federal employees are either entering or leaving federal buildings or on weekends when some facilities remain open to the public. Moreover, some FPS police officers and inspectors also said that reducing hours has increased their response times in some locations by as much as a few hours to a couple of days, depending on the location of the incident. The decrease in FPS's duty hours has also jeopardized police officer and inspector safety, as well as building security. Some inspectors said that they are frequently in dangerous situations without any FPS backup because many regions have reduced their hours of operations and overtime. In 2008, FPS transitioned to an inspector-based workforce--eliminating the police officer position--and is relying primarily on FPS inspectors for both law enforcement and physical security activities, which has hampered its ability to protect federal facilities. FPS believes that an inspector-based workforce approach ensures that its staff has the right mix of technical skills and training needed to accomplish its mission. However, FPS's ability to provide law enforcement services under its inspector-based workforce approach may be diminished because FPS relies on its inspectors to provide both law enforcement and physical security services simultaneously. This approach has contributed to a number of issues. For example, FPS faces difficulty ensuring the quality and timeliness of FSAs and adequate oversight of its 15,000 contract security guards. In addition, in our 2008 report, we found that representatives of several local law enforcement agencies we visited were unaware of FPS's transition to an inspector-based workforce and stated that their agencies did not have the capacity to take on the additional job of responding to incidents at federal facilities. In April 2007, a DHS official and several FPS inspectors testified before Congress that FPS's inspector- based workforce approach requires increased reliance on state and local law enforcement agencies for assistance with crime and other incidents at GSA facilities and that FPS would seek to enter into memorandums of agreement (MOA) with local law enforcement agencies. However, according to FPS's Director, the agency decided not to pursue MOA with local law enforcement officials, in part because of reluctance on the part of local law enforcement officials to sign such MOAs. In addition, FPS believes that the MOAs are not necessary because 96 percent of the properties in its inventory are listed as concurrent jurisdiction facilities where both federal and state governments have jurisdiction over the property. Nevertheless, these MOAs would clarify roles and responsibilities of local law enforcement agencies when responding to crime or other incidents. FPS does not fully ensure that its contract security guards have the training and certifications required to be deployed to a GSA building. FPS maintains a contract security guard force of about 15,000 guards that are primarily responsible for controlling access to federal facilities by (1) checking the identification of government employees, as well as members of the public who work in and visit federal facilities and (2) operating security equipment, including X-ray machines and magnetometers, to screen for prohibited materials such as firearms, knives, explosives, or items intended to be used to fabricate an explosive or incendiary device. We reported in July 2009, that 411 of the 663 guards (62 percent) employed by seven FPS contractors and deployed to federal facilities had at least one expired certification, including a declaration that the guards have not been convicted of domestic violence, which makes them ineligible to carry firearms. We also reported in July 2009, that FPS guards had not received adequate training to conduct their responsibilities. FPS requires that all prospective guards complete about 128 hours of training including 16 hours of X-ray and magnetometer training. However, in one region, FPS has not provided the X-ray or magnetometer training to its 1,500 guards since 2004. Nonetheless, these guards are assigned to posts at GSA buildings. X-ray training is critical because guards control access points at buildings. In addition, we also found that some guards were not provided building- specific training, such as what actions to take during a building evacuation or a building emergency. This lack of training may have contributed to several incidents where guards neglected their assigned responsibilities. Following are some examples: at a level IV facility, the guards did not follow evacuation procedures and left two access points unattended, thereby leaving the facility vulnerable; at a level IV facility, the guard allowed employees to enter the building while an incident involving suspicious packages was being investigated; and at a level III facility, the guard allowed employees to access the area affected by a suspicious package; this area was required to be evacuated. We also found that FPS has limited assurance that its guards are complying with post orders. In July 2009, we reported that FPS does not have specific national guidance on when and how guard inspections should be performed. Consequently, inspections of guard posts in 6 of the 11 regions we visited were inconsistent and varied in quality. We also found that guard inspections in the 6 regions we visited are typically completed by FPS during regular business hours and in locations where FPS has a field office and seldom at nights or on weekends or in nonmetropolitan areas. For example, in 2008, tenants in a level IV federal facility in a nonmetropolitan area complained to a GSA property manager that they had not seen FPS in over 2 years, there was no management of their guards, and the number of incidents at their facility was increasing. GSA officials contacted FPS officials and requested FPS to send inspectors to the facility to address the problems. Most guards are also stationed at fixed posts that they are not permitted to leave, which can impact their response to incidents. For example, we interviewed over 50 guards and asked them whether they would assist an FPS inspector chasing an individual in handcuffs escaping a federal facility. The guards' responses varied, and some guards stated they would likely do nothing and stay at their posts because they feared being fired for leaving. Other guards also told us that they would not intervene because of the threat of a liability suit for use of force and did not want to risk losing their jobs. Additionally, guards do not have arrest authority, although contract guards do have authority to detain individuals. However, according to some regional officials, contract guards do not exercise their detention authority also because of liability concerns. We found that GSA--the owner and lessee of many FPS protected facilities--has not been satisfied with the level of service FPS has provided since FPS transferred to DHS. For example, according to GSA officials, FPS has not been responsive and timely in providing assessments for new leases. GSA officials in one region told us that the quality of the assessments differs depending on the individual conducting the assessment. This official added that different inspectors will conduct assessments for the same building so there is rarely consistency from year to year, and often inspectors do not seem to be able to fully explain the countermeasures that they are recommending. We believe that FPS and GSA's information sharing and coordination challenges are primarily a result of not finalizing a new MOA that formalizes their roles and responsibilities. According to GSA officials, in November 2009, the two agencies have met to start working through the MOA section by section, and as of early March 2010 they have had four working group sessions and are anticipating an initial agreed upon draft in late spring 2010. In the absence of a clearly defined and enforced MOA, FPS officials told us they feel they are limited in their ability to protect GSA properties. Additionally, in 2009, we reported that tenant agencies have mixed views about some of the services they pay FPS to provide. For example, according to our generalizable survey of tenant agencies, About 82 percent of FPS's customers indicated they do not use FPS as their primary law enforcement agency in emergency situations, and said they primarily rely on other agencies such as local law enforcement, the U.S. Marshals Service, or the Federal Bureau of Investigation; 18 percent rely on FPS. About one-third of FPS's customers indicated that they were satisfied with FPS's level of communication, one-third were neutral or dissatisfied, while the remaining one-third could not comment on how satisfied or dissatisfied they were with FPS's level of communication on various topics including building security assessments, threats to their facility, and security guidance This response that suggests that the division of roles and responsibilities between FPS and its customers is unclear. Our survey also suggests that this lack of clarity is partly due to the little or no interaction customers have with FPS officers. Examples are as follows: A respondent in a leased facility commented that FPS has very limited resources, and the resources that are available are assigned to the primary federally owned building in the region. A respondent remembered only one visit from an FPS officer in the last 12 years. Over the past 5 years, we have conducted a body of work reviewing the operations of FPS and its ability to adequately protect federal facilities and we have made numerous recommendations to address these challenges. For example, we recommended FPS improve its effective long-term human capital planning, clarify roles and responsibilities of local law enforcement agencies in regard to responding to incidents at GSA facilities, develop and implement performance measures in various aspects of its operations, and improve its data collection and quality across its operations. While FPS has generally agreed with all of our recommendations, it has not completed many related corrective actions. At the request of Congress we are in the process of evaluating some of FPS's most recent actions. For example, FPS is developing the Risk Assessment and Management Program (RAMP), which could enhance its approach to assessing risk, managing human capital, and measuring performance. With regard to improving the effectiveness of FPS's risk management approach and the quality of FSAs, FPS believes RAMP will provide inspectors with the information needed to make more informed and defensible recommendations for security countermeasures. FPS also anticipates that RAMP will allow inspectors to obtain information from one electronic source, generate reports automatically, track selected countermeasures throughout their life cycle, and address some concerns about the subjectivity inherent in FSAs. In response to our July 2009 testimony, FPS took a number of immediate actions with respect to contract guard management. For example, the Director of FPS instructed Regional Directors to accelerate the implementation of FPS's requirement that two guard posts at Level IV facilities be inspected weekly. FPS also required more X-ray and magnetometer training for inspectors and guards. To improve its coordination with GSA, the FPS Director and the Director of GSA's Public Buildings Service Building Security and Policy Division participate in an ISC executive steering committee, which sets the committee's priorities and agendas for ISC's quarterly meetings. Additionally, FPS and GSA have established an Executive Advisory Council to enhance the coordination and communication of security strategies, policies, guidance, and activities with tenant agencies in GSA buildings. This council could enhance communication and coordination between FPS and GSA, and provide a vehicle for FPS, GSA, and tenant agencies to work together to identify common problems and devise solutions. We plan to provide Congress with our final reports on FPS's oversight of its contract guard program and our other ongoing FPS work later this year. Mr. Chairman, this completes 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 on this testimony, please contact me at (202) 512- 2834 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 statement. Individuals making key contributions to this testimony include Tammy Conquest, Assistant Director; Tida Barakat; Jonathan Carver; Delwen Jones; and Susan Michal-Smith. 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.

Recent events including last month's attack on Internal Revenue Service offices in Texas, and the January 2010 shooting in the lobby of the Nevada, federal courthouse demonstrate the continued vulnerability of federal facilities and the safety of the federal employees who occupy them. These events also highlight the continued challenges involved in protecting federal real property and reiterate the importance of protecting the over 1 million government employees, as well as members of the public, who work in and visit the nearly 9,000 federal facilities. This testimony is based on past GAO reports and testimonies and discusses challenges Federal Protective Service (FPS) faces in protecting federal facilities and tenant agencies' perspective of FPS's services. To perform this work, GAO visited a number of federal facilities, surveyed tenant agencies, analyzed documents, and interviewed officials from several federal agencies. Over the past 5 years GAO has reported that FPS faces a number of operational challenges protecting federal facilities, including: (1) FPS's ability to manage risk across federal facilities and implement security countermeasures is limited. FPS assesses risk and recommends countermeasures to the General Services Administration (GSA) and its tenant agencies, however decisions to implement these countermeasures are the responsibility of GSA and tenant agencies who have at times been unwilling to fund the countermeasures. Additionally, FPS takes a building-by-building approach to risk management, rather than taking a more comprehensive, strategic approach and assessing risks among all buildings in GSA's inventory and recommending countermeasure priorities to GSA and tenant agencies. (2) FPS has experienced difficulty ensuring that it has sufficient staff and its inspector-based workforce approach raises questions about protection of federal facilities. While FPS is currently operating at its congressionally mandated staffing level of no fewer than 1,200 full-time employees, FPS has experienced difficulty determining its optimal staffing level to protect federal facilities. Additionally, until recently FPS's staff was steadily declining and as a result critical law enforcement services have been reduced or eliminated. (3) FPS does not fully ensure that its contract security guards have the training and certifications required to be deployed to a federal facility. GAO found that FPS guards had not received adequate training to conduct their responsibilities. Specifically, some guards were not provided building-specific training, such as what actions to take during a building evacuation or a building emergency. This lack of training may have contributed to several incidents where guards neglected their assigned responsibilities. GSA has not been satisfied with FPS's performance, and some tenant agencies are unclear on FPS's role in protecting federal facilities. According to GSA, FPS has not been responsive and timely in providing security assessments for new leases. About one-third of FPS's customers could not comment on FPS's level of communication on various topics including security assessments, a response that suggests that the division of roles and responsibilities between FPS and its customers is unclear. FPS is taking some steps to better protect federal facilities. For example, FPS is developing a new risk assessment program and has recently focused on improving oversight of its contract guard program.

IRS believes that taxpayers are more likely to voluntarily comply with the tax laws if they believe that their return may be audited and unpaid taxes identified. In concert with audits, IRS uses other enforcement and nonenforcement methods. For example, IRS uses computers to match information returns filed by banks and other third parties with individual tax returns so it can identify unreported income. In recent years, IRS has also emphasized taxpayer education and assistance to encourage voluntary compliance. As part of its audit approach, IRS has established 10 audit classes for individual returns based on taxpayer income--5 involving returns without business income, and 5 involving returns with business income from self-employment. IRS tracks audit results by these audit classes and also by various audit sources--programs and techniques used to select potentially noncompliant returns for audit. Audit sources include, among others, suspected tax shelters, IRS and non-IRS referrals, compliance projects, and computer matches of third party information. One of the major audit sources--discriminant function (DIF)-- involves returns selected solely because of a computer score designed to predict individual tax returns most likely to result in additional taxes if audited. This scoring provides an objective way to select returns and has helped IRS avoid burdening potentially compliant taxpayers with an audit. Traditionally, IRS has done two types of face-to-face audits from its district offices to review taxpayers' books and records in support of a filed return: (1) field audits, in which an IRS revenue agent visits an individual taxpayer who has business income or a very complex return and (2) office audits, in which a tax auditor at an IRS office is visited by an individual taxpayer who has a less complex return. Tax examiners at IRS service centers also review returns and third-party information, and contact taxpayers concerning potential discrepancies on their returns. These discrepancies include such items as unreported income, as well as unallowable credits, such as the Earned Income Credit (EIC). Starting in fiscal year 1994, IRS decided to include all service center contacts by tax examiners as audits. IRS attributed this change to the fact that such contacts are part of its overall efforts to correct inaccurate returns. Unlike traditional field or office audits, these contacts usually involve a single tax issue on the return and do not involve a face-to-face audit. IRS is also counting other nontraditional types of work as audits, such as recent reviews of nonfilers done by district office auditors. After reviewing a taxpayer's support for the return, IRS auditors decide whether to recommend changes to tax liability. If a tax change is recommended, the taxpayer has the right to either agree with the recommended tax change or to appeal it through IRS' Office of Appeals or the courts. Depending on the outcome of such appeals, additional recommended tax revenue may or may not ultimately be assessed and collected. Our objectives were to provide information on the overall trend in IRS' individual audit rates and on the overall results of IRS' most recent individual audits. We did the audit rate analysis for fiscal years 1988 through 1995 because published data were readily available for this period. We did the audit results analysis for fiscal years 1992 through 1994 because this was the most recent readily available data. To determine the trend in IRS' audit rates, we reviewed IRS' annual reports for fiscal years 1987 through 1994 as well as unpublished data for fiscal year 1995. We collected information on the overall annual audit rates by type of taxpayer. We also collected information on the number of returns filed and the number of returns audited each year by IRS' regions and by the district offices within those regions. We reviewed this information to identify IRS' overall published audit rates for fiscal years 1988 through 1995, which included a combination of district office audits and service center contacts. To show what the overall rates would have been based solely on traditional district office audits, we recalculated these rates excluding service center contacts. We also used this information to calculate regional audit rates, both including and excluding service center contacts, as well as audit rates for each district office. To determine the specific results of IRS' audit efforts for fiscal years 1992 through 1994, we analyzed IRS Audit Information Management System (AIMS) data. IRS uses AIMS to track its audits of tax returns, including the resources used and any additional taxes recommended. We obtained copies of AIMS tapes for each year from fiscal year 1992 through 1994 and did various analyses to generate overall results for each year by (1) 10 individual audit classes, (2) 15 major audit sources, (3) 3 types of audit staff, and (4) 4 broad categories of audit closures. For each of these analyses, we determined the number and percentage of audited returns as well as the total direct hours and the total additional tax recommended for each year. From this information, we computed the direct hours per return, the taxes recommended per return, and the taxes recommended per direct hour for each year. Other than reconciling totals from the AIMS database to IRS' annual reports, we did not verify the accuracy of the AIMS data. Nor did we attempt an in-depth analysis to identify the reasons for the audit rate trends and audit results. Rather, we asked IRS Examination officials at the National Office to review our analysis of the audit rate trends and the audit results and provide explanations. We requested comments on a draft of this report from the Commissioner of Internal Revenue. On March 26, 1996, several IRS Examination Division officials, including the Acting Assistant Commissioner (Examination); Director, Management and Analysis; and, Team Leader, Management and Analysis, as well as a representative from IRS' Office of Legislative Affairs, provided us with both oral and written comments. Their comments are summarized on page 14 and have been incorporated in this report where appropriate. We performed our audit work in Washington, D.C., between August 1995 and February 1996 in accordance with generally accepted government auditing standards. Between fiscal years 1988 and 1993, IRS' audit rate for individuals decreased from 1.57 percent to 0.92 percent. IRS Examination Division officials told us that they attributed the decrease to more returns being filed by taxpayers; more time spent auditing complex returns by IRS auditors; and, an overall reduction in examination staffing. During fiscal years 1994 and 1995, the audit rate increased, reaching 1.67 percent by 1995. IRS officials told us they attributed this increase to the involvement of district office auditors in pursuing nonfiler cases and the increasing number of EIC claims reviewed by service center examination staff. Starting in fiscal year 1994, IRS decided to include all service center contacts by tax examiners in its audit rates. As a result, when the annual statistics for fiscal years 1993 and 1994 were published, IRS also recomputed its audit rates for fiscal years 1988 through 1992 to include all service center contacts. Counting such work as part of the audit rate, coupled with IRS recent nonfiler and EIC emphasis, tended to produce higher audit rates, as most of this work takes less time to do than traditional face-to-face audits. Figure 1 shows the trend in individual audit rates from fiscal years 1988 through 1995, based on rates that both include and exclude service center results. In analyzing the audit results from fiscal year 1992 through 1994, we did an in-depth review of various sources of IRS' audits. Our analysis of these sources illustrated the shift from traditional audits to other types of work. Over these 3 years, four sources accounted for over half of IRS' audits. As shown in figure 2, two of these--returns selected because of DIF or potential tax shelters--declined by at least half, while the other two--returns involving potential nonfilers or unallowable items--at least tripled. The first two sources reflect traditional audits and the latter two sources reflect nontraditional work, such as the nonfiler initiative and EIC claims, respectively. IRS' individual audit rates varied widely by geographic location, regardless of whether service center contacts and other nontraditional audits were included. As figure 3 shows, for fiscal year 1995 the rates tended to be highest in the western regions of the country and lowest in the middle regions. IRS Examination Division officials told us that these trends were consistent with TCMP data, which showed higher taxpayer noncompliance in IRS' Western and Southwest Regions and lower taxpayer noncompliance in its Central and Midwest Regions. With few exceptions, these regional patterns largely held true from fiscal years 1988 through 1995. (See table I.1 for our analysis of regional audit rates.) Throughout this period, audit rates also varied widely by district office. (See table I.2 for our analysis of district office audit rates.) Our analysis of the audit rates and audit results also identified patterns related to income reported by taxpayers. Our analysis focused on individuals who reported significant amounts of business income and individuals who did not report such income, (i.e., nonbusiness), particularly those that were in the lowest- and highest-income groups. Figure 4 shows that the IRS reported audit rates from fiscal years 1988 to 1995 (1) increased in the last 2 fiscal years among those in the lowest-income group (less than $25,000), particularly for business individuals, for whom the rate more than doubled, and (2) decreased among those in the highest-income group ($100,000 or more), particularly for nonbusiness individuals, for whom the fiscal year 1995 rate dropped to about one-fourth of what it had been in fiscal year 1988. IRS Examination Division officials said they attributed the increase in audit rates for the lowest-income groups, which generally occurred in fiscal years 1994 and 1995, to the nonfiler initiative and the recent emphasis on EIC. They said the decrease in audit rates for the highest-income nonbusiness individuals was due to an overall reduction in examination staffing coupled with an increase in the number of returns filed for this income group. (See table I.4 for our analysis of the audit rate trends for all income groups.) Concerning audit productivity measured by income groups, differing patterns emerged. In general, audits of the highest-income groups resulted in as much as 4 to 5 times more additional tax recommended per return--for both nonbusiness and business individuals--than did audits of the lowest-income groups. As figure 5 shows, from fiscal year 1992 to fiscal year 1994, additional taxes recommended per return (1) decreased among business individuals for the lowest-income group and increased for the highest-income group and (2) increased among nonbusiness individuals for the lowest-income group and decreased for the highest-income group. IRS Examination officials said the increases or decreases in additional taxes recommended from fiscal years 1992 to 1994 for both the highest-income business and nonbusiness individuals were affected by the small number of individual tax returns that IRS audited as part of its Coordinated Examination Program. This program is designed to audit the largest corporations; individual taxpayers audited under this program are usually corporate officers or shareholders. Another measure of audit productivity is the amount of additional taxes recommended for each direct audit hour used to complete the audit. Whereas from fiscal years 1992 to 1994, the amount of additional taxes recommended per direct hour was similar to the amount of additional taxes recommended per return for nonbusiness individuals; however, these amounts differed for business individuals. As figure 6 shows, from fiscal years 1992 to 1994, taxes recommended per direct hour (1) among business individuals increased for both the lowest- and highest-income groups and (2) increased among nonbusiness individuals for the lowest-income group and decreased for the highest-income group. (See tables II.1 through II.3 for an overall analysis of the results of audits by income classes.) We provide more detailed information from our analyses of various other elements of both the audit rates and the audit results in appendixes I and II. Such elements include audit rates by IRS district offices (tables I.2 and I.3), audit results on whether or not the IRS auditor recommended additional taxes, and if so, whether the taxpayer appealed the additional taxes recommended (tables II.10 through II.12), and the no-change rate for selected audit sources (table II.13). We requested comments on a draft of this report from the Commissioner of Internal Revenue or her designated representative. Responsible IRS Examination Division officials, including the Acting Assistant Commissioner (Examination); Director, Management and Analysis; and, Team Leader, Management and Analysis, as well as a representative from IRS' Office of Legislative Affairs provided IRS' comments in a March 26, 1996, meeting. They basically agreed with the information presented in the report and provided additional explanations for some of the audit trends and results, such as (1) the downward trend in overall audit rates, as well as the rate for the highest-income nonbusiness individuals, from fiscal years 1988 to 1993; (2) the increases or decreases in additional taxes recommended for the highest-income business and nonbusiness individuals from fiscal years 1992 to 1994; (3) the decrease in additional taxes recommended for the lowest-income business individuals from fiscal years 1992 to 1994; and (4) the amount of additional tax recommended per direct hour for the highest-income individuals compared to that for the lowest-income individuals. In response to their comments, we have incorporated the additional explanations in the report where appropriate. As agreed with you, unless you announce the contents of this report earlier, we plan no further distribution of this report until 30 days from the date of this letter. At that time, we will send copies of this report to various congressional committees, the Commissioner of Internal Revenue, and other interested parties. We also will make copies available to others upon request. The major contributors to this report are listed in Appendix III. If you have any questions concerning this report, please contact me at (202) 512-9044. This appendix presents our analysis of the trend in IRS' individual audit rates from fiscal year 1988 through fiscal year 1995. The audit rate is the percentage of individual tax returns that IRS has audited of the total number of individual tax returns filed. The appendix includes a comparison of IRS' published annual audit rates, which include both district office and service center results, with recomputed audit rates that we derived by excluding service center results. It also presents trends in individual audit rates by geographic location as well as by various income groups. Audit rate by fiscal year (continued) This appendix presents our analysis of the results of IRS' individual audits from fiscal year 1992 through fiscal year 1994. It includes information on the number of individual returns audited; the amount of direct hours and additional taxes recommended resulting from these audits; and a computation of the direct hours per return, as well as the additional taxes recommended per return and per direct hour, for the following four categories: (1) taxpayer income groups, (2) audit sources, (3) types of audit staff, and (4) types of audit closures. Table II.7: Number of Individual Returns Audited by Audit Sources, FYs 1992 Through 1994 Note 1: See glossary for definition of terms used in this table. Note 2: Percentages are the percent of total audits for the year and have been rounded to the nearest whole percent. Note 1: See glossary for definition of terms used in this table. Note 2: Dollars rounded to the nearest whole dollar. Table II.13: Number of Audits Resulting in No Change Without Adjustment, FYs 1992 Through 1994 Note 1: See glossary for definition of terms. Note 2: Percentages are the percent of individual audits resulting in No Change Without Adjustments by the specific audit source for the year, rounded to the nearest whole percent. Returns involving an audit of an amended return in which the taxpayer has claimed a refund. Returns identified through IRS' information gathering projects. Returns selected on the basis of a computer generated score (the scoring is based on an analysis technique known as discriminate function). Related returns from prior or subsequent years for the same taxpayer identified during the audit of a DIF-source return. Related returns identified during an audit of a DIF-source return, other than returns from prior or subsequent years. Related returns from prior or subsequent years for the same taxpayer, when the initial source was other than a DIF-source return. Audits initiated against known taxpayers who did not file a return with IRS. Over 25 other audit sources, such as referrals from other IRS Divisions, which were not one of the 10 largest sources during the period of our review. Manually selected returns for audit that do not result from other specified audit sources. Returns identified for audit due to questionable tax practitioners. Returns involving self-employment tax issues initiated by IRS service center examination staff. Returns identified through service center projects initiated by the IRS National Office. Returns identified from various state sources, generally under exchange agreements between the IRS and the states. Related returns of partners, grantors, beneficiaries, and shareholders identified during audits of either partnerships, fiduciaries, or Subchapter S corporations involving potential tax shelter issues. Total income, such as wages and interest, reported on a tax return prior to any deductions or adjustments. Returns involving refundable credits and dependency exemptions, such as the Earned Income Credit, initiated by service center examination staff. 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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Pursuant to a congressional request, GAO reviewed the Internal Revenue Service's (IRS) audits of individual taxpayers, focusing on: (1) IRS audit rates for individual returns; and (2) the overall results of IRS most recent audits of individual returns. GAO found that: (1) while the audit rate for individuals decreased between fiscal years (FY) 1988 and 1993 from 1.57 percent to .92 percent, it increased to 1.67 percent by FY 1995; (2) between FY 1992 and FY 1994, the number of audited computer-selected returns and returns with potential tax shelters declined by half, while the number of audited returns with potential nonfilers and returns with unallowable items tripled; (3) audit rates varied by region and district office; (4) between FY 1988 and FY 1995, audit rates were highest in the western region of the country and lowest in the central United States; (5) between FY 1988 and FY 1995, audit rates increased among those in the lowest-income group and decreased among those in the highest-income group; (6) audits of the highest-income group yielded the most recommended additional tax per return; and (7) between FY 1992 and 1994, additional taxes recommended for each direct audit hour increased for business individuals in the lowest and highest-income groups and nonbusiness individuals in the lowest-income group, and decreased for nonbusiness individuals in the highest-income group.

VA's mission is to promote the health, welfare, and dignity of all veterans in recognition of their service to the nation by ensuring that they receive medical care, benefits, social support, and memorials. According to VA, its employees maintain the largest integrated health care system in the nation for approximately 6 million patients, provide compensation and benefits for about 4 million veterans and beneficiaries, and maintain about 3 million gravesites at 164 properties. The use of information technology (IT) is crucial to the department's ability to provide these benefits and services, but without adequate protections, VA's systems and information are vulnerable to those with malicious intentions who wish to exploit the information. The evolving array of cyber-based threats can jeopardize the confidentiality, integrity, and availability of federal information systems and the information they contain. These threats can be unintentional or intentional. Unintentional threats can be caused by natural disasters; defective equipment; or the actions of careless, inattentive, or untrained employees that inadvertently disrupt systems. Intentional threats include both targeted and untargeted attacks from a variety of sources. These include disgruntled employees, criminal groups, hackers, and foreign nations engaged in espionage and information warfare. Such threat sources vary in terms of the types and capabilities of the actors, their willingness to act, and their motives. These threat sources make use of various techniques to compromise information or adversely affect computers, software, networks, an organization's operation, an industry, or the Internet itself. Such techniques include, among others, denial-of-service attacks and malicious software codes or programs. The unique nature of cyber-based attacks can vastly enhance their reach and impact, resulting in the loss of sensitive information and damage to economic and national security, the loss of privacy, identity theft, and the compromise of proprietary information or intellectual property. The increasing number of incidents reported by federal agencies has further underscored the need to manage and bolster the security of the government's information systems. The number of incidents affecting VA's information, computer systems, and networks has generally risen over the last several years. Specifically, in fiscal year 2007, the department reported 4,834 information security incidents to US-CERT; in fiscal year 2013, it reported 11,382 incidents. These included incidents related to unauthorized access, denial-of- service attacks; installation of malicious code; improper usage of computing resources; and scans, probes, and attempted access, among others. Figure 1 shows the overall increase in the total number of incidents VA reported to US-CERT for fiscal year 2007 through 2013. In addition, reports of incidents affecting VA's systems and information highlight the serious impact that inadequate information security can have on, among other things, the confidentiality, integrity, and availability of veterans' personal information. For example: According to a VA official, in January 2014 a software defect in VA's eBenefits system improperly allowed users to view the personal information of other veterans. According to this official, this defect potentially allowed almost 5,400 users to view data of over 1,300 veterans and/or their dependents. In May 2010, it was reported that VA officials had notified lawmakers of breaches involving the personal data of thousands of veterans, which had resulted from the theft of an unencrypted laptop computer from a VA contractor and a separate incident at a VA facility. To help protect against threats to federal systems, the Federal Information Security Management Act of 2002 (FISMA) sets forth a comprehensive framework for ensuring the effectiveness of information security controls over information resources that support federal operations and assets. The framework creates a cycle of risk management activities necessary for an effective security program. In order to ensure the implementation of this framework, FISMA assigns specific responsibilities to agencies, the Office of Management and Budget (OMB), the National Institute of Standards and Technology (NIST), and agency inspectors general. Specifically, each agency is required to develop, document, and implement an agency-wide information security program and to report annually to OMB, selected congressional committees, and the Comptroller General on the adequacy of its information security policies, procedures, practices, and compliance with requirements. For its part, OMB is required to develop and oversee the implementation of polices, principles, standards, and guidelines on information security in federal agencies. It is also responsible for reviewing, at least annually, and approving or disapproving agency information security programs. NIST's responsibilities include the development of security standards and guidance. Finally, inspectors general are required to evaluate annually the information security program and practices of their agency and submit the results to OMB. Further, Congress enacted the Veterans Benefits, Health Care, and Information Technology Act of 2006that year revealed weaknesses in VA's handling of personal information. Under the act, VA's chief information officer is responsible for establishing, maintaining, and monitoring department-wide information security policies, procedures, control techniques, training, and inspection requirements as elements of the department's information security program. It also reinforced the need for VA to establish and carry out the responsibilities outlined in FISMA, and included provisions to further after a serious loss of data earlier protect veterans and service members from the misuse of their sensitive personal information and to inform Congress regarding security incidents involving the loss of that information. Information security remains a long-standing challenge for the department. Specifically, VA has consistently had weaknesses in major information security control areas. For fiscal years 2007 through 2013, deficiencies were reported in each of the five major categories of information security controls as defined in our Federal Information System Controls Audit Manual. Access controls ensure that only authorized individuals can read, alter, or delete data. Configuration management controls provide assurance that only authorized software programs are implemented. Segregation of duties reduces the risk that one individual can independently perform inappropriate actions without detection. Contingency planning includes continuity of operations, which provides for the prevention of significant disruptions of computer-dependent operations. Security management includes an agency-wide information security program to provide the framework for ensuring that risks are understood and that effective controls are selected and properly implemented. In fiscal year 2013, for the 12th year in a row, VA's independent auditor reported that inadequate information system controls over financial systems constituted a material weakness. Specifically, the auditor noted that while VA had made improvements in some aspects of its security program, it continued to have control deficiencies in security management, access controls, configuration management, and contingency planning. In particular, the auditor identified significant technical weaknesses in databases, servers, and network devices that support transmitting financial and sensitive information between VA's medical centers, regional offices, and data centers. According to the auditor, this was the result of an inconsistent application of vendor patches that could jeopardize the data integrity and confidentiality of VA's financial and sensitive information. In addition, the VA OIG reported in 2013 that development of an effective information security program and system security controls continued to be a major management challenge for the department. The OIG noted that VA had taken steps to, for example, establish a program for continuous monitoring and implement standardized security controls across the enterprise. However, the OIG continued to identify weaknesses in the department's security controls and noted that improvements were needed in key controls to prevent unauthorized access, alteration, or destruction of major applications and general support systems. These more recent findings are consistent with the challenges VA has historically faced in implementing an effective information security program. In a number of products issued beginning in 1998, we have identified wide-ranging, often recurring deficiencies in the department's information security controls. These weaknesses existed, in part, because VA had not fully implemented key components of a comprehensive information security program. The persistence of similar weaknesses over 16 years later indicates the need for stronger, more focused management attention and action to ensure that VA fully implements a robust security program. In addition, we have recently reported on issues regarding the protection of personally identifiable information (PII) at federal agencies, including VA. In December 2013, we issued a report on our review of agency practices in responding to data breaches involving PII. determined the extent to which selected agencies had developed and implemented policies and procedures for responding to breaches involving PII. Regarding VA, we found that the department had addressed relevant management and operational practices in its data breach response policies and procedures. In addition, it had implemented its policies and procedures by preparing breach reports and performing risk assessments for cases of data breach. However, VA had not documented the rationale for all its risk determinations, documented the number of individuals affected by breaches, consistently notified individuals affected by high- risk breaches, consistently offered credit monitoring to affected individuals, or consistently documented lessons learned from PII breaches. Accordingly, we recommended that VA take specific steps to address these weaknesses. VA agreed with some, but not all, of these recommendations. We maintained that all our recommendations were warranted. GAO, Information Security: Agency Responses to Breaches of Personally Identifiable Information Need to Be More Consistent, GAO-14-34 (Washington, D.C.: Dec. 9, 2013). the computerized matching of personal information for purposes of determining eligibility for federal benefits programs. Under these amendments, agencies are required to establish formal agreements with other agencies to share data for computer matching, conduct cost-benefit analyses of such agreements, and establish data integrity boards to review and report on agency computer matching activities. Specifically regarding VA, we found that the department generally established computer matching agreements for its matching activities and conducted cost-benefit analyses of proposed matching programs. However, the completeness of these analyses varied in that they did not always include key costs and benefits needed to determine the value of a computer matching program. We noted that VA's guidance for developing cost-benefit guidance did not call for including key elements. We recommended that VA revise its guidance on cost-benefit analyses and ensure that its data integrity board review the analyses to make sure they include cost savings information. VA concurred and described steps it would take to implement our recommendations. The Subcommittee is considering draft legislation that is intended to improve VA's information security. The draft bill addresses governance of the department's information security program and security controls for the department's information systems. It requires the Secretary of Veterans Affairs to improve the transparency and coordination of the information security program and to ensure the security of the department's critical network infrastructure, computers and servers, operating systems, and web applications, as well as its Veterans Health Information Systems and Technology Architecture system, from vulnerabilities that could affect the confidentiality of veterans' sensitive personal information. For each of these elements of VA's computing environment, the draft bill identifies specific security-related actions and activities that VA is required to perform. Many of the actions and activities specified in the proposed legislation are sound information security practices and consistent with federal guidelines, if implemented on a risk-based basis. FISMA requires agencies to implement policies and procedures that are based on risk assessments, cost-effectively reduce information security risks to an acceptable level, and ensure that information security is addressed throughout the life cycle of each agency information system. The provisions in the draft bill may prompt VA to refocus its efforts on actions that are necessary to improve the security over its information systems and information. In a dynamic environment where innovations in technology and business practices supplant the status quo, control activities that are appropriate today may not be appropriate in the future. Emphasizing that specific security-related actions should be taken based on risk could help ensure that VA is better able to meet the objectives outlined in the draft bill. Doing this would allow for the natural evolution of security practices as circumstances warrant and may also prevent the department from focusing exclusively on performing the specified actions in the draft bill to the detriment of performing other essential security activities. In summary, VA's history of long-standing challenges in implementing an effective information security program has continued, with the department exhibiting weaknesses in all major categories of security controls in fiscal year 2013. These challenges have been further highlighted by recent determinations that weaknesses in information security have contributed to a material weakness in VA's internal controls over financial reporting and continue to constitute a major management challenge for the department. While the draft legislation being considered by the Subcommittee may prod VA into taking needed corrective actions, emphasizing that these should be taken based on risk can provide the flexibility needed to respond to an ever-changing technology and business environment. Chairman Coffman, Ranking Member Kirkpatrick, and Members of the Subcommittee, this concludes my statement today. I would be happy to answer any questions you may have. If you have any questions concerning this statement, please contact Gregory C. Wilshusen at (202) 512-6244 or [email protected] or Nabajyoti Barkakati at (202) 512-4499 or [email protected]. Other individuals who made key contributions to this statement include Jeffrey L. Knott and Anjalique Lawrence (assistant directors), Jennifer R. Franks, Lee McCracken, and Tyler Mountjoy. Computer Matching Act: OMB and Selected Agencies Need to Ensure Consistent Implementation. GAO-14-44. Washington, D.C.: January 13, 2014. Information Security: Agency Responses to Breaches of Personally Identifiable Information Need to Be More Consistent. GAO-14-34. Washington, D.C.: December 9, 2013. Federal Information Security: Mixed Progress in Implementing Program Components; Improved Metrics Needed to Measure Effectiveness. GAO-13-776. Washington, D.C.: September 26, 2013. Cybersecurity Human Capital: Initiatives Need Better Planning and Coordination. GAO-12-8. November 29, 2011. Information Technology: Department of Veterans Affairs Faces Ongoing Management Challenges. GAO-11-663T. Washington, D.C.: May 11, 2011. Information Security: Federal Agencies Have Taken Steps to Secure Wireless Networks, but Further Actions Can Mitigate Risk. GAO-11-43. Washington, D.C.: November 30, 2010. Information Security: Veterans Affairs Needs to Resolve Long-Standing Weaknesses. GAO-10-727T. Washington, D.C.: May 19, 2010. Information Security: Federal Guidance Needed to Address Control Issues with Implementing Cloud Computing. GAO-10-513. May 27, 2010. Information Security: Agencies Need to Implement Federal Desktop Core Configuration Requirements. GAO-10-202. Washington, D.C.: March 12, 2010. Veterans: Department of Veterans Affairs' Implementation of Information Security Education Assistance Program. GAO-10-170R. Washington, D.C.: December 18, 2009. Department of Veterans Affairs: Improvements Needed in Corrective Action Plans to Remediate Financial Reporting Material Weaknesses. GAO-10-65. Washington, D.C.: November 16, 2009. Information Security: Protecting Personally Identifiable Information. GAO-08-343. Washington, D.C.: January 25, 2008. Information Security: Sustained Management Commitment and Oversight Are Vital to Resolving Long-Standing Weaknesses at the Department of Veterans Affairs. GAO-07-1019. Washington, D.C.: September 7, 2007. Privacy: Lessons Learned about Data Breach Notification. GAO-07-657. Washington, D.C.: April 30, 2007. Information Security: Veterans Affairs Needs to Address Long-Standing Weaknesses. GAO-07-532T. February 28, 2007. Veterans Affairs: Leadership Needed to Address Information Security Weaknesses and Privacy Issues. GAO-06-866T. Washington, D.C.: June 14, 2006. Veterans Affairs: The Critical Role of the Chief Information Officer Position in Effective Information Technology Management. GAO-05-1017T. Washington, D.C.: September 14, 2005. Information Security: Weaknesses Persist at Federal Agencies Despite Progress Made in Implementing Related Statutory Requirements. GAO-05-552. Washington, D.C.: July 15, 2005. Veterans Affairs: Sustained Management Attention Is Key to Achieving Information Technology Results. GAO-02-703. Washington, D.C.: June 12, 2002. VA Information Technology: Progress Made, but Continued Management Attention Is Key to Achieving Results. GAO-02-369T. Washington, D.C.: March 13, 2002. VA Information Technology: Important Initiatives Begun, Yet Serious Vulnerabilities Persist. GAO-01-550T. Washington, D.C.: April 4, 2001. VA Information Technology: Progress Continues Although Vulnerabilities Remain. T-AIMD-00-321. Washington, D.C.: September 21, 2000. VA Information Systems: Computer Security Weaknesses Persist at the Veterans Health Administration. AIMD-00-232. Washington, D.C.: September 8, 2000. Information Security: Serious and Widespread Weaknesses Persist at Federal Agencies. AIMD-00-295. Washington, D.C.: September 6, 2000. Information Technology: VA Actions Needed to Implement Critical Reforms. AIMD-00-226. Washington, D.C.: August 16, 2000. Information Systems: The Status of Computer Security at the Department of Veterans Affairs. AIMD-00-5. Washington, D.C.: October 4, 1999. VA Information Systems: The Austin Automation Center Has Made Progress in Improving Information System Controls. AIMD-99-161. Washington, D.C.: June 8, 1999. Major Management Challenges and Program Risks: Department of Veterans Affairs. OCG-99-15. Washington, D.C.: January 1, 1999. Information Systems: VA Computer Control Weaknesses Increase Risk of Fraud, Misuse, and Improper Disclosure. AIMD-98-175. Washington, D.C.: September 23, 1998. 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 use of information technology is crucial to VA's ability to carry out its mission of ensuring that veterans receive medical care, benefits, social support, and memorials. However, without adequate security protections, VA's systems and information are vulnerable to exploitation by an array of cyber-based threats, potentially resulting in, among other things, the compromise of veterans' personal information. GAO has identified information security as a government-wide high-risk area since 1997. The number of information security incidents reported by VA has more than doubled over the last several years, further highlighting the importance of securing the department's systems and the information that resides on them. GAO was asked to provide a statement discussing the challenges VA has experienced in effectively implementing information security, as well as to comment on a recently proposed bill aimed at improving the department's efforts to secure its systems and information. In preparing this statement GAO relied on previously published work as well as a review of recent VA inspector general and other reports related to the department's security program. GAO also analyzed the draft legislation in light of existing federal requirements and best practices for information security. The Department of Veterans Affairs (VA) continues to face long-standing challenges in effectively implementing its information security program. Specifically, from fiscal year 2007 through 2013, VA has consistently had weaknesses in key information security control areas (see table). In addition, in fiscal year 2013, the department's independent auditor reported, for the 12th year in a row, that weaknesses in information system controls over financial systems constituted a material weakness. Further, the department's inspector general has identified development of an effective information security program and system security controls as a major management challenge for VA. These findings are consistent with challenges GAO has identified in VA's implementation of its security program going back to the late 1990s. More recently, GAO has reported and made recommendations on issues regarding the protection of personally identifiable information at federal agencies, including VA. These were related to developing and implementing policies and procedures for responding to data breaches, and implementing protections when engaging in computerized matching of data for the purposes of determining individuals' eligibility for federal benefits. Draft legislation being considered by the Subcommittee addresses the governance of VA's information security program and security controls for the department's systems. It would require the Secretary of VA to improve transparency and coordination of the department's security program and ensure the security of its critical network infrastructure, computers and servers, operating systems, and web applications, as well as its core veterans health information system. Toward this end, the draft legislation prescribes specific security-related actions. Many of the actions and activities specified in the bill are sound information security practices and consistent with federal guidelines. If implemented on a risk-based basis, they could prompt VA to refocus its efforts on steps needed to improve the security of its systems and information. At the same time, the constantly changing nature of technology and business practices introduces the risk that control activities that are appropriate in the department's current environment may not be appropriate in the future. In light of this, emphasizing that actions should be taken on the basis of risk may provide the flexibility needed for security practices to evolve as changing circumstances warrant and help VA meet the security objectives in the draft legislation.

To protect its critical assets, DOD has established several protection measures for weapon systems. These measures include information assurance to protect information and information systems, software protection to prevent the unauthorized distribution and exploitation of critical software, and anti-tamper techniques to help delay exploitation of technologies through means such as reverse engineering when U.S. weapons are exported or lost on the battlefield. Examples of anti-tamper techniques include software encryption, which scrambles software instructions to make them unintelligible without first being reprocessed through a deciphering technique, and hardware protective coatings designed to make it difficult to extract or dissect components without damaging them. In 1999, the Under Secretary of Defense for Acquisition, Technology, and Logistics (AT&L) issued a policy memorandum for implementing anti- tamper protection in acquisition programs. In the following year, AT&L issued a policy memorandum stating that technologies should be routinely assessed during the acquisition process to determine if they are critical and if anti-tamper techniques are needed to protect these technologies. In 2001, an AT&L policy memorandum designated the Air Force as the Anti- Tamper Executive Agent. The executive agent's office, which currently has four staff, is responsible for implementing DOD's anti-tamper policy and managing anti-tamper technology development through the Air Force Research Laboratory. The executive agent also holds periodic information sessions to educate the acquisition community about anti-tamper policy, initiatives, and technology developments. To coordinate activities, military services and defense agencies, such as the Missile Defense Agency, have an anti-tamper point of contact. Program managers are responsible for ensuring anti-tamper protection is incorporated on any weapon system with critical technologies that need protection. Since it is not feasible to protect every technology, program managers are to conduct an assessment to determine if anti-tamper protection is needed. When assessing if anti-tamper protection is needed, program managers make several key decisions regarding the identification of critical technologies, assessment of threats and vulnerabilities, and determination of anti-tamper techniques or solutions. The process begins with determining whether or not their system's critical program information includes any critical technologies. If it is determined that the system has no critical technologies, program managers are to document the decision and request concurrence from either the office within their component that is designated with anti-tamper responsibilities or the Anti-Tamper Executive Agent. For systems that are determined to have critical technologies, the next key steps are to identify potential threats and vulnerabilities and select anti-tamper techniques to protect those technologies. Techniques are ultimately verified and validated by a team composed of representatives from the DOD components. The program manager documents decisions in an annex of the program protection plan. In 2004, we reported that program managers had difficulty in carrying out DOD's anti-tamper policy on individual weapons, such as identifying critical technologies and experiencing cost increases or schedule delays when applying anti-tamper techniques--particularly when the techniques are not fully developed or when the systems are already in design or production. We made several recommendations, including increasing oversight over the identification of critical technologies across programs, improving tools and resources for program managers in identifying critical technologies, ensuring early identification of anti-tamper costs and solutions, monitoring the development of generic anti-tamper solutions and evaluating their effectiveness, and developing a business case to determine whether the current organizational structure and resources are adequate. DOD concurred or partially concurred with these recommendations. DOD has taken some steps to implement our recommendations including identifying available anti-tamper technical resources and developing a searchable spreadsheet of critical technologies, incorporating information in the Defense Acquisition Guidebook on the need for early identification of anti-tamper solutions in a weapon system, and sponsoring a study on anti-tamper techniques and their general effectiveness. While DOD has taken these steps to address parts of the recommendations, all remain open. DOD has recently taken several actions aimed at raising awareness about its anti-tamper policy and assisting program managers in implementing anti-tamper protection on a weapon system. Despite these actions, DOD still lacks departmentwide direction to implement its anti-tamper policy. Without such direction, DOD components are left to develop their own initiatives to assist program managers in implementing anti-tamper protection. While individual efforts are important, such as a database to track critical program information DOD-wide, their effectiveness may be limited because they have yet to be accepted and adopted across all DOD components. Since our 2004 report, DOD, through the Anti-Tamper Executive Agent, has developed some resources aimed at assisting program managers as they go through the anti-tamper decision process. DOD's resources range from providing general information about the anti-tamper policy to research on anti-tamper solutions. Specifically, DOD has developed a guidebook that includes a checklist to assist program managers in identifying security, management, and technical responsibilities when incorporating anti-tamper protection on a weapons system; developed a searchable spreadsheet to assist program managers in developed a Web site for program managers to provide general anti- tamper information, policy resources, conference briefings, implementation resources, and current events; coordinated with Defense Acquisition University to design and launch an online learning module on anti-tamper protection; funded Sandia National Laboratories to study anti-tamper techniques and their general effectiveness; and sponsored research to develop generic anti-tamper techniques through Small Business Innovation Research, a research program that funds early-stage research and development projects at small technology companies. DOD has also updated two acquisition documents with general anti- tamper information. The first document--DOD Instruction 5000.2, Operation of a Defense Acquisition System--currently states that one of the purposes of the System Development and Demonstration phase of a weapon system is to ensure affordability and protection of critical program information by implementing appropriate solutions such as anti- tamper protection. The second document--the Defense Acquisition Guidebook--has been updated to include some basic information on the importance of implementing anti-tamper protection early in the development of a weapon system and describes program managers' overall responsibilities for implementing the anti-tamper policy. While DOD has issued broad policy memorandums that reflect the department's desire for routinely assessing weapon systems to determine if anti-tamper protection is needed, the department has not fully incorporated the anti-tamper policy into its formal acquisition guidance. Specifically, DOD Instruction 5000.2 mentions anti-tamper protection, but the department has not provided direction for implementation of anti- tamper in a formal directive or instruction. Currently, the department is coordinating comments on a draft instruction (DOD Instruction 5200.39) on protection of critical program information that includes anti-tamper implementation. However, in commenting on the draft instruction, several DOD components have raised concerns about when and how to define critical program information that warrants protection, which have contributed to long delays in finalizing the instruction. In addition, the department has not provided specific guidance for program managers on how to implement anti-tamper protection in a DOD manual because DOD officials said this process cannot begin until the instruction is finalized. The date for finalizing the instruction has not yet been determined. Officials from the executive agent's office stated that departmentwide direction would give credence to the anti-tamper policy in practice. Anti- tamper points of contact told us that the policy memorandums are not sufficient to ensure that program managers are implementing anti-tamper protection on weapon systems when necessary. One service anti-tamper point of contact stated that program managers might disregard the policy memorandums because they are high-level and broad. Another service anti-tamper point of contact said that implementation is ultimately left up to the individual program manager. While a program manager's decision should be approved by the milestone decision authority and documented in the program protection plan, some service and program officials said that programs are not always asked about anti-tamper protection during the review. Lacking departmentwide direction for the anti-tamper policy, DOD components have been left to develop their own initiatives to assist program managers in anti-tamper implementation. However, the usefulness of these initiatives depends on the extent to which other components participate in these efforts. For example, the Missile Defense Agency developed a risk assessment model to help program managers identify how much anti-tamper is needed to protect critical technologies. Specifically, the model helps program managers assess the criticality of the technology relative to the risk of exploitation. However, when the Missile Defense Agency sought comments on the initiative, the executive agent and services indicated that it was too lengthy and complex to use. The executive agent, in coordination with anti-tamper points of contact from the Missile Defense Agency and services, has taken over this effort, and it is still in development. The Navy is also implementing an initiative: a database intended to capture the information that programs across DOD components have identified as critical. Many officials we spoke with pointed to this database as a potential tool to improve identification of critical program information across DOD components. To date, the Navy and the Army are submitting information for the database, but the Missile Defense Agency and Air Force are not. The Missile Defense Agency anti-tamper point of contact stated that its information is classified at a level above what the database can support and its program managers will not submit information for the database unless DOD requires submissions by all DOD components. However, the Missile Defense Agency does have access to the database and uses it as a cross-check to determine if it is identifying similar critical program information. The Air Force has been briefed on the initiative but does not yet have consent from all of the commands to participate. Without full participation across all DOD components, the usefulness of this database as a tool to identify critical technologies that may need anti- tamper protection will be limited. To determine whether anti-tamper protection is needed, program managers must identify which technologies are deemed critical, determine the potential threats and vulnerabilities to these technologies, and identify sufficient anti-tamper solutions to protect the technologies. Such decisions involve a certain level of subjectivity. However, program managers lack the information or tools needed to make informed assessments at these key decision points. As a result, some technologies that need protection may not be identified or may not have sufficient protection. Determining technologies that are critical is largely left to the discretion of the program managers. While DOD has some resources available to program managers to help identify critical technologies, they may be of limited use. For example, the executive agent's searchable spreadsheet of critical technologies may not be comprehensive because it relies on DOD's Militarily Critical Technologies List, which we reported in 2006 was largely out of date. Also, some program offices have used a series of questions established in a 1994 DOD manual on acquisition systems protection to help guide their discussions on what is critical. However, these questions are broad and subject to interpretation, and can result in different conclusions, depending on who is involved in the decision-making process. In addition, identifying what is critical varies by DOD component and sometimes by program office. For example, one Air Force program office tried various approaches, including teams of subject matter experts, over 2 years to identify its list of critical program information. In contrast, the Army took the initiative to establish a research center to assist program managers in identifying critical program information, but Army officials stated that the approach used by the center has led to an underestimating of critical program information and critical technologies in programs. At the same time, there has been limited coordination across programs on technologies that have been identified as critical--creating a stove piped process--which could result in one technology being protected under one program and not protected under another. While informal coordination can occur, programs did not have a formal mechanism for coordinating with other programs, including those within their service. For example, officials from one program office stated they had little interaction from programs within their service or other services to ensure protection of similar technologies. A program under one joint program executive office had not coordinated with other programs to identify similar technologies as critical. In addition, according to an Army official, contractors who have worked on programs across services have questioned why one service is applying anti-tamper solutions to a technology that another service has not identified as critical. Finally, one program office we spoke with identified critical program information on its system but indicated that a similar system in another service had not identified any critical program information and, therefore, had no plans to implement anti- tamper protection. Despite the risk that some technologies that need protection may not be identified or may not be protected across programs, no formal mechanism exists within DOD to provide a horizontal view of what is critical. However, any effort to do so could be undermined by the programs' and services' different definitions and interpretations of "critical program information" and "critical technologies." The Anti-Tamper Executive Agent defines critical program information as capturing all critical technologies. In contrast, the Army's interpretation is that critical program information only includes critical technologies that are state-of-the-art. For the Navy, critical program information includes software, while hardware is part of what the Navy defines as critical technologies. One program that is part of a joint program office identified critical program information as including company proprietary information. As a result, tracking critical program information may not provide a horizontal view of all technologies services and programs have identified as needing anti-tamper protection. Once a program office identifies critical technologies, the next step in the anti-tamper decision process is to identify threats to those technologies. DOD's Program Manager's Guidebook and Checklist for Anti-tamper states that multiple threat assessments should be requested from either the service intelligence organization or counterintelligence organization. One program office we visited stated that it has requested and received multiple threat assessments from the intelligence community, which have sometimes contradicted one another, leaving the program office to decipher the information and determine the threat. According to an anti- tamper point of contact, other programs have received contradictory information--typically relating to foreign countries' capabilities to reverse engineer. The potential impact of contradictory intelligence reports is twofold: If the threat is deemed to be low but is actually high, the technology is susceptible to reverse engineering; conversely, if the threat is deemed to be high and is actually low, the anti-tamper solution is more robust than needed. To assist with the process of identifying threats, program offices may request threat assessments from a group within the Defense Intelligence Agency. However, this group was not able to complete assessments for approximately 6 months during 2006. While the group has resumed completing assessments, an agency official stated that it is not able to produce as many assessments as before due to limited resources. The Defense Intelligence Agency does not turn down program offices that may request assessments, but does have to put them in a queue and provide them with previous assessments, if they exist, until it can complete a full assessment for the program office. One program office indicated that it took 6 to 9 months for the agency to complete its assessment. Program managers also lack the tools needed to identify the optimal anti- tamper solutions for those critical technologies that are vulnerable to threats. Most notably, program managers lack a risk model to assess the relative strengths of different anti-tamper solutions and a tool to help estimate their costs. According to National Security Agency officials, who are available to provide support to program managers considering or implementing anti- tamper protection, program managers and contractors sometimes have difficulty determining appropriate solutions. Four of five programs we spoke with that had experience in this area of the anti-tamper decision process had difficulty identifying how much anti-tamper protection was enough to protect a critical technology. For example, one program official told us that an anti-tamper solution developed for one of the program's critical technologies may not be sufficient to prevent reverse engineering. Another program office stated that it is difficult to choose between competing contractors without knowing how to determine the appropriate level of anti-tamper protection needed. An anti-tamper point of contact said that program managers need a tool to help them assess the criticality of a technology versus the types of threats to that technology. Implementing a suboptimal anti-tamper solution can have cost and performance implications for the program. Specifically, if the solution provides less anti-tamper protection than is needed, the program may have to retrofit additional anti-tamper protection to allow for a more robust solution. Not only can such retrofitting add to a program's costs, it can compromise performance. Given limited resources and tools for determining anti-tamper solutions, some program office officials told us that to satisfy anti-tamper solutions they relied on other protection measures. For example, officials in one program office stated that anti-tamper protection and information assurance were interchangeable and indicated that following the National Security Agency's information assurance requirements--which number in the hundreds--should be sufficient as an anti-tamper solution for this system. This same program was not aware of anti-tamper resources and did not coordinate with an anti-tamper validation and verification team on its solutions. Also, an official from another program office indicated that anti-tamper protection and information assurance are similarly defined. While DOD and service officials agreed that some information assurance and anti-tamper measures may overlap, fulfilling information assurance requirements does not guarantee a sufficient anti-tamper solution. In establishing various policies to protect its critical assets, DOD saw anti- tamper as a key way to preserve U.S. investment in critical technologies while operating in an environment of coalition warfare and a globalized industry. Program managers are ultimately responsible for implementing DOD's anti-tamper policy. However, a lack of direction, information, and tools from DOD to implement its policy has created significant challenges for program managers. Further, this policy can compete with the demands of meeting program cost and schedule objectives, particularly when the optimal anti-tamper solution is identified late in the schedule. Until DOD establishes a formal directive or instruction for implementing its policy departmentwide and equips program managers with adequate implementation tools, program managers will continue to face difficulties in identifying critical technologies and implementing anti-tamper protection. As DOD examines its policies for protecting critical assets, we are recommending that the Secretary of Defense direct the Under Secretary of Acquisition, Technology, and Logistics, in coordination with the Anti- Tamper Executive Agent and the Under Secretary of Defense for Intelligence, to issue or be involved in developing and providing departmentwide direction for application of its anti-tamper policy that prescribes how to carry out the policy and establishes definitions for critical program information and critical technologies. To help ensure the effectiveness of anti-tamper implementation, we also recommend that the Secretary of Defense direct the Anti-Tamper Executive Agent to identify and provide additional tools to assist program managers in the anti-tamper decision process. In written comments on a draft of this report, DOD concurred with our recommendation that the Secretary of Defense direct the Anti-Tamper Executive Agent to identify additional tools to assist program managers in the anti-tamper decision process. DOD stated that the Anti-Tamper Executive Agent is drafting Anti-Tamper Standard Guidelines to facilitate proper implementation of anti-tamper protection across the department. DOD did not concur with our recommendation that the Secretary of Defense direct the Under Secretary of Defense (AT&L) in coordination with the Anti-Tamper Executive Agent and the Under Secretary of Defense (Intelligence) to issue departmentwide direction for application of its anti- tamper policy that prescribes how to carry out the policy and establishes definitions for critical program information and critical technologies. DOD stated that the Under Secretary of Defense (Intelligence) has primary responsibility for DOD Directive 5200.39, a security and counterintelligence support directive to acquisition programs, and its successor, DOD Instruction 5200.39 regarding protection of critical program information. The Under Secretary of Defense (Intelligence) is currently coordinating an update to this directive. Once it is issued, the department plans to update DOD 5200.1-M, which provides the execution standards and guidelines to meet the DOD Instruction 5200.39 policy. While DOD has issued broad policy memorandums beginning in 1999 that reflect the department's desire for routinely assessing weapon systems to determine if anti-tamper protection is needed, the department has not fully incorporated anti-tamper policy into its formal acquisition guidance. As we have reported, service officials indicated collectively that these policy memorandums are high-level, broad, and leave implementation ultimately up to the individual program manager. DOD did not indicate when the update of DOD Directive 5200.39 might be complete and guidance on anti- tamper implementation issued. We continue to believe that such direction is currently needed and that the Under Secretary of Defense for Acquisition, Technology, and Logistics, who issued the policy memorandums and is responsible for anti-tamper policy, should be involved in developing and providing the appropriate direction whether it be the update to DOD Directive 5200.39 or another vehicle. That direction should include how to implement the anti-tamper policy and how critical program information and critical technologies are defined. We continue to believe that the direction, which has been lacking since the policy was initiated in 1999, should not be further delayed. If DOD continues to experience delays in updating DOD Directive 5200.39, it should consider interim measures to meet the immediate need for anti-tamper direction. DOD's letter is reprinted in appendix II. We are sending copies of this report to interested congressional committees, as well as the Secretary of Defense; the Director, Office of Management and Budget; and the Assistant to the President for National Security Affairs. In addition, this report will be made 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 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. Others making key contributions to this report are listed in appendix III. To identify actions the Department of Defense (DOD) has taken to implement its anti-tamper policy since 2004, we reviewed DOD policies and guidance governing anti-tamper protection on weapon systems and obtained documents on various initiatives. We interviewed officials from the Anti-Tamper Executive Agent, military services, and other DOD components such as the Missile Defense Agency; Acquisition, Technology and Logistics; Defense Intelligence Agency; National Security Agency; and the Air Force Research Laboratory about initiatives or actions taken regarding anti-tamper. Through these interviews and documents, we also determined the status of our 2004 anti-tamper report recommendations. We interviewed DOD officials from Networks and Information Integration, Science and Technology, and Counterintelligence to discuss anti-tamper protection and how it relates to other program protection measures. To determine how program managers implemented DOD's anti-tamper policy, we interviewed officials from 14 program offices. We are not identifying the names of the programs due to classification concerns. We conducted structured interviews with 7 of the 14 program offices to discuss and obtain documents about their experiences with implementing the anti-tamper decision process and identify any challenges they faced. We selected 6 of these programs from a list of weapon systems identified in Anti-Tamper Executive Agent, services, and component documents as considering and/or implementing anti-tamper protection and a seventh program considering anti-tamper that we identified during the course of our fieldwork. Systems we selected represented a cross section of acquisition programs and various types of systems in different phases of development. For the remaining programs, we interviewed 7 not identified by the Anti-Tamper Executive Agent or the services as considering and/or implementing anti-tamper to obtain their viewpoints on DOD's anti-tamper policy and implementation. We selected these programs by identifying lists of DOD acquisition programs and comparing them to the Anti-Tamper Executive Agent's, services', and components' lists of program considering and/or implementing anti-tamper. We did not evaluate whether programs had implemented sufficient anti-tamper protection. In addition to the contact named above, Anne-Marie Lasowski (Assistant Director), Gregory Harmon, Molly Whipple, Karen Sloan, John C. Martin, and Alyssa Weir made major contributions to this report. High-Risk Series: An Update. GAO-07-310. Washington, D.C.: January 2007. Export Controls: Challenges Exist in Enforcement of an Inherently Complex System. GAO-07-265. Washington, D.C.: December 20, 2006. Defense Technologies: DOD's Critical Technologies Lists Rarely Inform Export Control and Other Policy Decisions. GAO-06-793. Washington, D.C.: July 28, 2006. President's Justification of the High Performance Computer Control Threshold Does Not Fully Address National Defense Authorization Act of 1998 Requirements. GAO-06-754R. Washington, D.C.: June 30, 2006. Export Controls: Improvements to Commerce's Dual-Use System Needed to Ensure Protection of U.S. Interests in the Post-9/11 Environment. GAO-06-638. Washington, D.C.: June 26, 2006. Defense Trade: Enhancements to the Implementation of Exon-Florio Could Strengthen the Law's Effectiveness. GAO-05-686. Washington, D.C.: September 28, 2005. Industrial Security: DOD Cannot Ensure Its Oversight of Contractors under Foreign Influence Is Sufficient. GAO-05-681. Washington, D.C.: July 15, 2005. Defense Trade: Arms Export Control Vulnerabilities and Inefficiencies in the Post-9/11 Security Environment. GAO-05-468R. Washington, D.C.: April 7, 2005. Defense Trade: Arms Export Control System in the Post-9/11 Environment. GAO-05-234. Washington, D.C.: February 16, 2005. Defense Acquisitions: DOD Needs to Better Support Program Managers' Implementation of Anti-Tamper Protection. GAO-04-302. Washington, D.C.: March 31, 2004. Defense Trade: Better Information Needed to Support Decisions Affecting Proposed Weapons Transfers. GAO-03-694. Washington, D.C.: July 11, 2003.

The Department of Defense (DOD) invests billions of dollars on sophisticated weapon systems and technologies. These may be at risk of exploitation when exported, stolen, or lost during combat or routine missions. In an effort to minimize this risk, DOD developed an anti-tamper policy in 1999, calling for DOD components to implement anti-tamper techniques for critical technologies. In March 2004, GAO reported that program managers had difficulties implementing this policy, including identifying critical technologies. This follow-up report (1) describes recent actions DOD has taken to implement its anti-tamper policy and (2) identifies challenges facing program managers. GAO reviewed documentation on actions DOD has taken since 2004 to implement its anti-tamper policy, and interviewed officials from the Anti-Tamper Executive Agent's Office, the military services, other DOD components, and a cross-section of program offices. Since 2004, DOD has taken several actions to raise awareness about anti-tamper protection and develop resources that provide program managers with general information on its anti-tamper policy. These actions include developing a Web site with anti-tamper information and events, establishing an online learning module on anti-tamper protection, and sponsoring research on generic anti-tamper techniques. However, DOD lacks departmentwide direction for implementation of its anti-tamper policy. Without such direction, individual DOD components are left on their own to develop initiatives. For example, the Navy is developing a database that is intended to provide a horizontal view of what DOD components have identified as critical program information. While many officials we spoke with pointed to this database as a potential tool for identifying critical technologies that may need anti-tamper protection, the database is currently incomplete. Specifically, the Missile Defense Agency is not providing information because its information is classified at a level above what the database can support. Also, the Air Force is not currently providing information because not all commands have provided consent to participate. At the same time, program managers face challenges implementing DOD's anti-tamper policy--due largely to a lack of information or tools needed to make informed assessments at key decision points. First, program managers have limited information for defining what is critical or insight into what technologies other programs have deemed critical to ensure similar protection across programs. Determining whether technologies are critical is largely left to the discretion of the individual program manager, resulting in an uncoordinated and stove piped process. Therefore, the same technology can be identified as critical in one program office but not another. Second, program managers have not always had sufficient or consistent information from the intelligence community to identify threats and vulnerabilities to technologies that have been identified as critical. The potential impact of inconsistent threat assessments is twofold: If the threat is deemed to be low but is actually high, the technology is susceptible to tampering; conversely, if the threat is deemed to be high and is actually low, an anti-tamper solution is more robust than needed. Finally, program managers have had difficulty selecting sufficient anti-tamper solutions--in part because they lack information and tools, such as risk and cost-estimating models, to determine how much anti-tamper protection is needed. As a result, program managers may select a suboptimal solution. Given these combined challenges, there is an increased risk that some technologies that need protection may not be identified or may not have sufficient protection.

Before discussing the specifics of DOE trade missions, I would first like to provide some context by reviewing DOE's statutory authority for conducting overseas trade missions and its role within the federal export promotion apparatus. According to DOE, the Secretary was given explicit statutory authority to undertake export promotion activities under various legislative enactments, including the Export Enhancement Act of 1992 and the Energy Policy Act of 1992. We have reviewed this legislation and agree that the Secretary has the authority to conduct export promotion activities, including trade mission activities. Regarding its role in the federal export promotion apparatus, DOE is a member of the interagency TPCC, whose role is to increase the effectiveness and coordination of all activities involving government promotion of exports. TPCC is chaired by the Commerce Department and is comprised of 19 federal agencies. According to the TPCC's latest annual report, DOE funded about $14 million for export promotion in fiscal year 1995, making it one of the smallest TPCC players in terms of funding.Federal export promotion funding totaled about $3.1 billion in fiscal year 1995. Three federal agencies--the U.S. Department of Agriculture, the U.S. Export-Import Bank (Eximbank), and the Department of Commerce--accounted for about 90 percent of all federal export promotion funding for fiscal year 1995. DOE's high-level advocacy on behalf of U.S. energy companies is conducted in emerging energy markets like China, India, and Pakistan. According to DOE, each of these countries will need new sources of energy in the coming years, representing a huge potential market for U.S. businesses. For example, DOE anticipates that China will need an estimated 100,000 megawatts of new electric power generation over the next 5 years, with each new 1,000-megawatt power plant generally valued at $1 billion. In addition, India is expected to need more than an estimated 140,000 megawatts of new electric power by 2007, requiring an investment of about $200 billion. According to DOE, overall, Asian economies alone are expected to spend as much as $1 trillion on power-related infrastructure over the next 15 years, and U.S. cutting-edge technologies in the electric power, renewable energy, and energy efficiency fields provide important opportunities for the United States to compete for this business. DOE's high-level advocacy is also a response to similar advocacy efforts that foreign governments conduct in energy markets. TPCC reports that competitor industrialized nations perform similar export promotion activities and that foreign governments are increasingly aggressive in helping their firms compete for major projects in foreign markets. Foreign governments use a variety of tactics, including performing high-level advocacy, providing project financing (including low-interest-rate loans and corporate financial assistance), and making promises of technology transfer and aid funds in order to obtain projects for their own companies. For instance, in January 1996, the Canadian Prime Minister and 7 ministers took 300 business representatives from a variety of industry sectors to India. Advocacy is not just limited to our major industrialized competitors. In August 1995, a Malaysian cross-sectoral trade mission of 250 high-level government officials and business executives visited South Africa at the same time that the U.S. Secretary of Energy's trade mission was visiting the country. In general, several factors make it difficult to quantify the precise impact of federal advocacy activities: (1) The determination of whether the sales generated through trade missions are additional to what would have been exported in their absence is not always clear. (2) Numerous participants (U.S. government agencies as well as foreign governments) may be involved in a single project. This makes it difficult to identify and isolate the contribution of any one participant. (3) Figures used to quantify the success of trade missions, particularly if they are based on tentative business agreements such as letters of intent or memorandums of understanding, may be speculative. (4) The calculation of the value of follow-on sales agreements and maintenance contracts that can flow from the introduction of U.S. engineering and technological standards is difficult. These sales can be as significant in monetary terms as the original sales contract. TPCC has recognized some of the difficulties in measuring the results of export promotion programs and has tasked a TPCC working group to develop better performance measures for these activities. An update of working group activities will be provided in the next TPCC annual report due for release in September 1996. DOE has also recognized some of the uncertainties associated with this issue and is now reviewing its estimation practices. Despite the difficulties in measuring the impact of federal advocacy activities, DOE has reported the results of its advocacy based on the value of signed business agreements. In a December 28, 1995, letter to the Chairman of this Committee, the Secretary of Energy stated that the Secretary's four trade missions resulted in $19.7 billion in potential and finalized agreements. These agreements include memorandums of intent or understanding (the first and necessary step to any business deal), fuel supply and power purchase agreements for power plants, oil and gas exploration and production agreements, and other steps necessary to advance business deals. According to DOE, this was the total estimate of deals signed, as reported by the U.S. companies on these missions. As you requested, we reviewed DOE's estimates of the impact of its advocacy. In response, I would like to clarify what the $19.7 billion is and what it is not. The $19.7 billion is the total potential value of business agreements signed during the four trade missions led by the Secretary, two follow-up trade missions that were led by the Secretary or Deputy Secretary, and several follow-up visits of foreign trade delegations to the United States (see app. I). The $19.7 billion estimate is not the finalized value of deals to the United States or the value of U.S. exports. Moreover, for some of the agreements that have been finalized, the U.S. export value is substantially less than 50 percent of the project's total exports. DOE has reported that of the $19.7 billion in agreements, about $2.03 billion in business agreements have reached either "financial closure" or "sales agreement," that is, have been finalized. In an effort to clarify what this number represents, we conducted an independent review of the 14 business deals that DOE used as the basis for the $2.03 billion estimate (see app. II). As part of this process, we reviewed DOE documents and interviewed government officials. We also interviewed business representatives from most of these companies and studied their written responses to questions posed by this Committee. We studied related business filings, annual reports, and business journal articles for these deals as well. Although we are including private-sector estimates of the potential value of U.S. exports associated with these deals, we caution that these projections are inherently uncertain. Our review of the likely composition of the 14 deals makes it clear that the $2.03 billion figure that DOE reported should not be confused with the potential U.S. export value of the deals. For example, the largest single deal reported by DOE is a $660-million power project in Pakistan with an estimated U.S. export value of about $218 million (over 30 percent of the total project value), which represents virtually all of the total exports associated with the project, according to Eximbank officials. The Eximbank provided financing for this project. In some of the cases, the U.S. export value is substantially less than 50 percent of the total exports associated with the agreements. For example, three power plant projects valued at about $950 million comprise about 47 percent of the $2.03 billion: Two power projects in Pakistan, sponsored by the same company, have a total value of $700 million and estimated exports of $400 million. The estimated U.S. export value is about $80 million (20 percent), according to company officials and the financing documents we reviewed. Japan's Export-Import Bank and Mitsubishi Heavy Industries are major participants in financing and constructing these projects, which suggests that Japanese companies will receive a significant share of the sales. One $250-million power plant in India has estimated exports of about $160 million. The estimated U.S. export value is about $40 million (25 percent), according to a company official. The U.K.'s Export Credit Guarantees Department and the U.K.'s Rolls Royce company are major participants in this project, which suggests that U.K. companies will receive a significant share of the sales. While examining these U.S. export content issues, we noted that DOE does not have or use guidelines that specifically incorporate U.S. content considerations as a basis for selecting businesses on DOE-led trade missions. The Commerce Department has developed advocacy guidelines to assist U.S. government personnel in determining whether and to what extent U.S. government support is appropriate in advocating for individual projects. Given the increasingly complex nature of international transactions, the Commerce Department guidelines were developed in 1993 to assist U.S. government officials in making these determinations. The guidelines place a premium on U.S. content, including employment, in the determination of whether and to what extent a given project is considered to be in the national interest. Company representatives that participated in the missions generally supported the Secretary's efforts. Although several of the company officials we interviewed said their completed business agreements would have occurred without DOE's involvement, many also said that their projects were accelerated as a result of the trade missions. Others, including some Commerce Department officers stationed in the four overseas posts that DOE visited, cited such intangible benefits as increased credibility with foreign officials and the opportunity to establish new or high-level contacts with business and government officials. Now let me turn to the administration of DOE's trade missions. The procedures that DOE used for chartering aircraft, recovering costs from nonfederal participants, approving the travel expenses of certain nonfederal travelers, and obtaining services from U.S. embassies were weak. These procedures have been the subject of critical reports from our office and the DOE Inspector General (IG). Our recent work highlights issues of continuing concern. According to program officials, the planning for these missions was complicated by time constraints and frequent, last-minute changes in plans. These planning difficulties were further compounded by DOE's lack of familiarity with the requirements for conducting large, overseas trade missions. We noted that the Secretary's first trade mission, the mission to India, took place less than 2 months after President Clinton made a commitment to send a high-level mission to India during Prime Minister Rao's May 1994 state visit. DOE's second trade mission, to Pakistan, took place less than 3 months after the India trip. According to DOE officials, "heroic" efforts were sometimes needed to overcome the ad hoc planning process to ensure that the missions were completed on schedule. DOE has recognized these inadequacies and in March 1996 introduced some new, interim international travel policies and procedures to address these management weaknesses. These new procedures are designed to help assure that DOE's future international missions are more cost-effective and better managed, but they have yet to be fully tested in practice. A DOE official told us that DOE believes that the newly designed procedures are adequate to ensure that taxpayers' interests are protected. The costs of air transportation services represent the largest expense of the four DOE missions. DOE's total cost of the four missions was about $2.8 million (see app. III). According to program officials, DOE used an evolving process for obtaining air transportation services for the four trade missions. For the July 1994 India trip, DOE used a Department of Defense VC-137, the military version of the Boeing 707. DOE managed the fare collections from the non-DOE passengers. Passengers were billed after the trip was completed. For the September 1994 Pakistan trip, DOE chartered a DC-8 through a charter agent. DOE used a Department of the Interior working capital fund as the mechanism to pay for the charter aircraft and to collect fares from the federal and nonfederal travelers. For the February 1995 China trip, DOE's contract travel agency, Omega Travel, chartered a DC-8 through a charter agent. DOE assisted Omega in chartering the aircraft and collecting the fares from the nonfederal passengers. For the August 1995 South Africa trip, DOE chartered a DC-8 through a charter agent. The charter agent managed the fare collections for all passengers. Government Transportation Requests were used as the vehicle for paying DOE's costs of the charter aircraft. DOE justified the use of charter aircraft for the trade missions because of a special need for planning and conferencing facilities during enroute travel. According to DOE, no scheduled commercial airline service could fulfill this need. In at least one instance, DOE did not fully comply with the requirements of federal regulations devised to help ensure the efficient and effective management and use of government aviation resources. Provisions of the Federal Property Management Regulations require advance written approval for travel on government aircraft by DOE's General Counsel or his principal deputy on a trip-by-trip basis. Although such approval was obtained for the India and South Africa trip, it was not obtained for the Pakistan trip or the China trip. DOE acknowledged that prior written approval should have been obtained for the Pakistan trip. DOE officials said prior written approval was not needed for the China trip because it did not involve the use of a DOE-chartered aircraft but instead the DOE purchase of seats for federal travelers from a General Services Administration (GSA) contractor. DOE stated that GSA advised DOE at the time that the regulatory requirement for General Counsel approval was not applicable to this situation. It is clear that using military and charter aircraft added to the costs of the trips. We compared the government cost of using charter aircraft to regularly scheduled commercial air service using cost estimates and related information developed by DOE before each trip. We estimate that the decision to use the military and charter aircraft increased the cost to the government by at least $588,435 (i.e., the savings if the government-funded travelers had used commercial air carriers for each of the four trade missions (see app. IV)). DOE said that security considerations on the India trip and the need for conferencing facilities on all the missions precluded the use of commercial aircraft. DOE efforts to recover costs from the trade missions' nonfederal participants have also been problematic. Although DOE established a policy of full-cost recovery after the India trip, it has yet to completely realize this goal, as of March 26, 1996. It still has a total of $50,646 in accounts receivable from the first two trips ($29,646 from the Pakistan trip). On the last two missions, collecting fares was the responsibility of the company that chartered the aircraft. I would also like to point out that DOE paid $50,595 to cover the additional cost of a scheduled trip to Kimberley and the cost of an unplanned stop in Capetown on the South Africa trip. None of these costs were passed on to the other nonfederal travelers. A DOE official said DOE did not attempt to recover the additional costs because DOE was responsible for making the decisions that added to the costs. They also said they would face a loss of credibility with the U.S. business community if they attempted to recover the additional costs of these trips after the travelers had already been billed. I would now like to take a few moments and discuss DOE's handling of "invitational travelers" on its trade missions. The term "invitational traveler," as used in this testimony, refers to those nonfederal travelers who participated in the missions and had their travel expenses paid for by DOE (see app. V). This term does not refer to the private sector representatives who participated on these missions and paid their own way. The regulations governing DOE's payment of travel expenses of "invitational travelers" are contained in 10 C.F.R. Part 1060. The regulations state that DOE may pay the travel expenses of a nonfederal traveler provided that the person receives an invitation from DOE to confer with a DOE employee "on matters essential to the advancement of DOE programs or objectives." If the meetings occur at a place other than the conferring employee's post of duty, a principal departmental officer (the DOE Secretary, Deputy Secretary, or Under Secretary) must have approved and stated the reasons for the invitation in writing before the travel takes place. The regulations also permit payment of such travel expenses where a principal departmental officer has determined in writing that "it is in the interest of the Government to provide such payment," and DOE's General Counsel has determined in writing that the payment is authorized by statute. The duties to be performed by a principal departmental officer cannot be delegated. In 77 percent (17 of 22) of the cases, DOE did not provide documentation showing prior written justification for the invitational travelers. In their comments on this testimony, DOE pointed out that some documents existed indicating Office of the Secretary approval, but DOE agrees it was not in complete compliance with 10 C.F.R. Part 1060. In our January 1996 testimony before this Committee, we highlighted some of the problems that DOE was encountering in documenting the expenses it incurred when using U.S. embassy services for administrative and logistical support on two of the four missions. For example, DOE did not have written procedures that specified either the types of records to be kept or the process to follow in obtaining support for foreign travel from U.S. embassies. During our review of the Secretary's trip to India, DOE officials could not provide records to substantiate some of the costs of the mission. DOE has taken several steps to address this problem, including the development of detailed written procedures and closer cooperation from the State Department in obtaining improved documentation of overseas expenses. A DOE official said DOE hopes to resolve issues related to the embassies' charges by the end of May 1996. DOE is still in the process of analyzing the expense reports received from overseas posts in connection with administrative and logistical support charges for the July 1994 India trade mission and the other three trade missions that we examine in today's testimony. DOE provided us with the following status report on its efforts: The total embassy logistical and support costs charged to DOE for the four missions were about $409,674. DOE has accepted about $257,555 of these charges, has disputed or rejected about $135,119 of these charges, and continues to review about $17,000 of these charges. Some of the charges rejected by DOE include $14,170 for a double billing of a banquet that was not a DOE expense and $6,346 for aircraft fueling services not requested. Mr. Chairman, this concludes my prepared remarks. I will be happy to answer any questions you or other Members of the Subcommittee may have. Value of agreements (millions) DOE Dep. Sec. (Reverse trade missions to the United States) Value assigned by DOE (millions) Company official estimated U.S. exports at less than $5 million (Table notes on next page) Note 1: We use "finalized business agreements" to refer to agreements DOE describes as reached financial closure or sales agreements." Note 2: DOE did not cite any finalized business agreements for the South Africa trade mission. Tables III.1-5 illustrate the total estimated costs of four DOE trade missions, from July 1994 to August 1995. Administration & logistics (provided by State Dept.) Administration & logistics (provided by State Dept.) Administration & logistics (provided by State Dept.) Administration & logistics (provided by State Dept.) Total estimated commercial fare for government passengers 15 (25.4%) 20 (30.8%) 26 (38.8%) 25 (37.3%) South Africa comparison excluded the additional costs of the charter aircraft trips to Kimberley and Capetown. South Africa - Aug. 1995 17 (77%) To complete our work, we interviewed DOE officials; company officials; U.S. Export-Import Bank (Eximbank) officials; and Department of Commerce officials, including Foreign Commercial Service officers stationed abroad. We reviewed various DOE and Commerce Department documents, including DOE trade mission trip reports, and over 17,000 pages of documentation provided by DOE to this Subcommittee. We also reviewed financing documents provided by the Treasury Department and the Eximbank, DOE press releases, and other documents relating to specific business agreements and companies. At the request of this Subcommittee, we focused on the 14 business agreements that DOE characterized as having reached "financial closure or sales agreement." We did not review the other business agreements that were characterized as potential agreements by DOE. We contacted the 13 companies associated with these agreements to obtain additional information about the nature and extent of DOE's assistance. In two cases, we were not able to obtain a company response to our questions. We relied on the businesses involved to provide estimates of the U.S. export value and the size of their agreements. We did not verify the value of the estimates provided nor did we examine the actual contracts associated with the business agreements. In regard to the costs of the trips, we relied upon information provided by DOE's Office of the Chief Financial Officer. 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. 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GAO discussed four trade missions sponsored by the Department of Energy (DOE), focusing on: (1) DOE authority and role in these missions; (2) the results of the missions; and (3) management weaknesses inherent in DOE-sponsored trade missions. GAO noted that: (1) the Secretary of Energy has explicit statutory authority to undertake export promotion activities; (2) in 1995, DOE funding for export promotion totalled $14 million; (3) DOE performed advocacy on behalf of U.S. energy companies seeking to capture some of the emerging energy markets in China, India, and Pakistan; (4) it is difficult to measure the impact of these federal advocacy activities because sales forecasts are unclear, of the numerous participants involved, and of problems in calculating the value of sales agreements and maintenance contracts; (5) the four trade missions resulted in $19.7 billion in potential and finalized fuel supply and power purchase agreements and oil and gas exploration agreements; (6) DOE subsequently reported that finalized agreements totalled $2.03 billion, but export data show that the value of these agreements seem to be overstated by over 50 percent; (7) most companies participating in DOE trade missions support DOE efforts, but a few said that they could complete their business agreements without DOE involvement; (8) the planning for these missions is complicated by time constraints, last minute changes in plans, and lack of familiarity with conducting large, overseas trade missions; and (9) DOE has introduced new procedures to correct DOE management weaknesses, but they have not been fully tested in practice.

Pursuant to Executive Order 13327, the administration has taken several key actions to strategically manage real property. FRPC was established in 2004, which subsequently created interagency committees to work toward developing and implementing a strategy to accomplish the executive order. FRPC developed a sample asset management plan and published Guidance for Improved Asset Management in December 2004. In addition, FRPC established asset management principles that form the basis for the strategic objectives and goals in the agencies' asset management programs and also worked with GSA to develop and enhance an inventory system known as the Federal Real Property Profile (FRPP). FRPP was designed to meet the executive order's requirement for a single database that includes all real property under the control of executive branch agencies. The FRPC, with the assistance of the GSA Office of Government-wide Policy, developed 23 mandatory data elements, which include four performance measures. The four performance measures are utilization, condition index, mission dependency, and annual operating and maintenance costs. In addition, a performance assessment tool has been developed, which is to be used by agencies to analyze the inventory's performance measurement data in order to identify properties for disposal or rehabilitation. In June 2006, FRPC added a data element for disposition that included six major types of disposition, including sale, demolition, or public benefit conveyance. Finally, to assist agencies in their data submissions for the FRPP database, FRPC provided standards and definitions for the data elements and performance measures through guidance issued on December 22, 2004, and a data dictionary issued by GSA in October 2005. The first governmentwide reporting of inventory data for FRPP took place in December 2005, and selected data were included in the fiscal year 2005 FRPP published by GSA, on behalf of FRPC, in June 2006. Data on the four performance measures were not included in the FRPP report. Adding real property asset management to the PMA has increased its visibility as a key management challenge and focused greater attention on real property issues across the government. OMB has identified goals related to the four performance measures in the inventory for agencies to achieve in right-sizing their real property portfolios and it is the administration's goal to reduce the size of the federal real property inventory by 5 percent, or $15 billion, by disposing of unneeded assets by 2015. In October 2006, the administration reported that $3.5 billion in unneeded federal real property had been disposed of since 2004. To achieve these goals and gauge an agency's success in accurately accounting for, maintaining, and managing its real property assets so as to efficiently meet its goals and objectives, the administration established the real property scorecard in the third quarter of fiscal year 2004. The scorecard consists of 13 standards that agencies must meet to achieve green status, which is the highest status. These 13 standards include 8 standards needed to achieve yellow status, plus 5 additional standards. An agency reaches "green" or "yellow" status if it meets all of the standards for success listed in the corresponding column in figure 1 and red if it has any of the shortcomings listed in the "red" column. OMB evaluates agencies quarterly on progress and agencies then have an opportunity to update OMB on their status towards achieving green. According to PMA real property scorecards, for the second quarter of fiscal year 2007, the Department of Labor is the only real property-holding agency included in the real property initiative that failed to meet the standards for yellow status as shown in figure 2. All of the other agencies, have, at a minimum, met the standards for yellow status. Among the 15 agencies under the real property initiative, 5 agencies--GSA NASA, Energy, State, and VA--have achieved green status. According to OMB, the agencies achieving green status have established 3-year timelines for meeting the goals identified in their asset management plans; provided evidence that they are implementing their asset management plans; used real property inventory information and performance measures in decision making; and managed their real property in accordance with their strategic plan, asset management plan, and performance measures. Once an agency has achieved green status, OMB continues to monitor its progress and results through PMA using deliverables identified in its 3-year timeline and quarterly scorecards. Each quarter, OMB also provides formal feedback to agencies through the scorecard process, along with informal feedback, and clarifies expectations. Yellow status agencies still have various standards to meet before achieving green. In addition to addressing their real property initiative requirements, some agencies have taken steps toward addressing some of their long-standing problems, including excess and underutilized property and deteriorating facilities. Some agencies are implementing various tools to prioritize reinvestment and disposal decisions on the basis of agency needs, utilization, and costs. For example, GSA officials reported that GSA's Portfolio Restructuring Strategy sets priorities for disposal and reinvestment based on agency missions and anticipated future need for holdings. In addition, GSA developed a methodology to analyze its leased inventory in fiscal year 2005. This approach values leases over their life, not just at the point of award; considers financial performance and the impact of market rental rates on current and future leasing actions; and categorizes leases by their risk and value. Additionally, some agencies are taking steps to make the condition of core assets a priority and address maintenance backlog challenges. For example, Energy officials reported establishing budget targets to align maintenance funding with industry standards as well as programs to reduce the maintenance backlogs associated with specific programs. In addition, Interior officials reported that the department has conducted condition assessments for 72,233 assets as of fourth quarter fiscal year 2006. As mentioned previously, Executive Order 13327 requires that OMB, along with landholding agencies, develop legislative initiatives to improve federal real property management and establish accountability for implementing effective and efficient real property management practices. Some individual agencies have obtained legislative authority in recent years to use certain real property management tools, but no comprehensive legislation has been enacted. Some agencies have received special real property management authorities, such as the authority to enter into EUL agreements. These agencies are also authorized to retain the proceeds of the lease and to use them for items specified by law, such as improvement of their real property assets. DOD, Energy, Interior, NASA, USPS, and VA are authorized to enter into EUL agreements and have authority to retain proceeds from the lease. These authorities vary from agency to agency, and in some cases, these authorities are limited. For example, NASA is authorized to enter into EUL agreements at two of its centers, and VA's authority to enter into EUL agreements expires in 2011. In addition, VA was authorized in 2004 to transfer real property under its jurisdiction or control and to retain the proceeds from the transfer in a capital asset fund for property transfer costs, including demolition, environmental remediation, and maintenance and repair costs. VA officials noted that although VA is authorized to transfer real property under its jurisdiction or control and to retain the proceeds from such transfers, this authority has significant limitations on the use of any funds generated by any disposal under this authority. Additionally, GSA was given the authority to retain proceeds from disposal of its real property and to use the proceeds for its real property needs. Agencies with enhanced authorities believe that these authorities have greatly improved their ability to manage their real property portfolios and operate in a more businesslike manner. Overall, the administration's efforts to raise the level of attention to real property as a key management challenge and to establish guidelines for improvement are noteworthy. The administrative tools, including asset management plans, inventories, and performance measures, were not in place to strategically manage real property before we updated our high- risk list in January 2005. The actions taken by major real property-holding agencies and the administration to establish such tools are clearly positive steps. However, these administrative tools and the real property initiative have not been fully implemented, and it is too early to determine if they will have a lasting impact. Implementation of these tools has the potential to produce results such as reductions in excess property, reduced maintenance and repair backlogs, less reliance on leasing, and an inventory that is shown to be reliable and valid. Although clear progress has been made toward strategically managing federal real property and addressing some long-standing problems, real property remains a high-risk area because the problems persist and obstacles remain. Agencies continue to face long-standing problems in the federal real property area, including excess and underutilized property, deteriorating facilities and maintenance and repair backlogs, reliance on costly leasing, and unreliable real property data. Federal agencies also continue to face many challenges securing real property. These problems are still pervasive at many of the major real property-holding agencies, despite agencies' individual attempts to address them. Although the changes being made to strategically manage real property are positive and some realignment has taken place, the size of agencies' real property portfolios remains generally outmoded. As we have reported, this trend largely reflects a business model and the technological and transportation environment of the 1950s. Many of these assets and organizational structures are no longer needed; others are not effectively aligned with, or responsive to, agencies' changing missions. While some major real property-holding agencies have had some success in attempting to realign their infrastructures in accordance with their changing missions, others still maintain a significant amount of excess and underutilized property. For example, officials with Energy, DHS, and NASA--which are three of the largest real property-holding agencies--reported that over 10 percent of the facilities in their inventories were excess or underutilized. The magnitude of the problem with underutilized or excess federal real property continues to put the government at risk for lost dollars and missed opportunities. Table 1 describes the status of excess and underutilized real property challenges at the nine major real property- holding agencies. Addressing the needs of aging and deteriorating federal facilities remains a problem for major real property-holding agencies. According to recent estimates, tens of billions of dollars will be needed to repair or restore these assets so that they are fully functional. Furthermore, much of the federal portfolio was constructed over 50 years ago, and these assets are reaching the end of their useful lives. Energy, NASA, GSA, Interior, State, and VA reported repair and maintenance backlogs for buildings and structures that total over $16 billion. In addition, DOD reported a $57 billion restoration and modernization backlog. We found that there was variation in how agencies reported data on their backlog. Some agencies reported deferred maintenance figures consistent with the definition used for data on deferred maintenance included in their financial statements. Others provided data that included major renovation or restoration needs. More specifically, For DOD, facilities restoration and modernization requirements total over $57 billion. Officials noted that the backlog does not reflect the impact of 2005 Base Realignment and Closures (BRAC) or related strategic rebasing decisions that will be implemented over the next several years. For Energy, the backlog in fiscal year 2005 for a portfolio valued at $85.2 billion was $3.6 billion. For Interior, officials reported an estimated maintenance backlog of over $3 billion for buildings and other structures. GSA's current maintenance backlog is estimated at $6.6 billion. For State, the maintenance backlog is estimated at $132 million, which includes all of the deferred/unfunded maintenance and repair needs for prior fiscal years. For NASA, the restoration and repair backlog is estimated at over $2.05 billion as of the end of fiscal year 2006. For VA, the maintenance backlog for facilities with major repair needs is estimated at $5 billion, and according to VA officials, VA must address this aged infrastructure while patient loads are changing. Many of the major real property-holding agencies continue to rely on leased space to meet new space needs. As a general rule, building ownership options through construction or purchase are often the least expensive ways to meet agencies' long-term requirements. Lease purchases--under which payments are spread out over time and ownership of the asset is eventually transferred to the government-- are often more expensive than purchase or construction but are generally less costly than using ordinary operating leases to meet long-term space needs. For example, we testified in October 2005 that for the Patent and Trademark Office's long-term requirements in northern Virginia, the cost of an operating lease was estimated to be $48 million more than construction and $38 million more than lease purchase. However, over the last decade we have reported that GSA--as the central leasing agent for most agencies-- relies heavily on operating leases to meet new long-term needs because it lacks funds to pursue ownership. Operating leases have become an attractive option, in part because they generally "look cheaper" in any given year, even though they are often more costly over time. Under current budget scorekeeping rules, the budget generally should record the full cost of the government's commitment. Operating leases were intended for short-term needs and thus, under the scorekeeping rules, for self-insuring entities, only the amount needed to cover the first year lease payments plus cancellation costs needs to be recorded. However, the rules have been stretched to allow budget authority for some long-term needs being met with operating leases to be spread out over the term of the lease, thereby disguising the fact that over time, leasing will cost more than ownership. Resolving this problem has been difficult; however, change is needed because the current practice of relying on costly leasing to meet long-term space needs result in excessive costs to taxpayers and does not reflect a sensible or economically rational approach to capital asset management, when ownership would be more cost effective. Five of the nine largest real property-holding agencies--Energy, Interior, GSA, State, and VA--reported an increased reliance on operating leases to meet new space needs over the past 5 years. According to DHS officials, per review of GSA's fiscal year 2005 and 2006 lease acquisition data for DHS, there has been no significant increase in GSA acquired leased space for DHS. In addition, officials from NASA and USPS reported that their agency's use of operating leases has remained at about the same level over the past 5 years. We did not analyze whether the leasing activity at these agencies, either in the aggregate or for individual leases, resulted in longer-term costs than if these agencies had pursued ownership. For short-term needs, leasing likely makes economic sense for the government in many cases. However, our past work has shown that, generally speaking, for long-term space needs, leasing is often more costly over time than direct ownership of these assets. While the administration and agencies have made progress in collecting standardized data elements needed to strategically manage real property, the long-term benefits of the new real property inventory have not yet been realized, and this effort is still in the early stages. The federal government has made progress in revamping its governmentwide real property inventory since our 2003 high-risk designation. The first governmentwide reporting of inventory data for FRPP took place in December 2005, and GSA published the data on behalf of FRPC, in June 2006. According to the 2005 FRPP report, the goals of the centralized database are to improve decision making with accurate and reliable data, provide the ability to benchmark federal real property assets, and consolidate governmentwide real property data collection into one system. According to FRPC, these improvements in real property and agency performance data will result in reduced operating costs, improved asset utilization, recovered asset values, and improved facility conditions, among others. It is important to note that real property data contained in the financial statements of the U.S. government have also been problematic. The CFO Act, as expanded by the Government Management Reform Act, requires the annual preparation and audit of individual financial statements for the federal government's 24 major agencies. The Department of the Treasury is also required to compile consolidated financial statements for the U.S. government annually, which we audit. In March 2007, we reported that-- for the tenth consecutive year--certain material weaknesses in internal controls and in selected accounting and financial reporting practices resulted in conditions that continued to prevent us from being able to provide the Congress and the American people with an opinion as to whether the consolidated financial statements of the U.S. government were fairly stated in conformity with U.S. generally accepted accounting principles. Further, we also reported that the federal government did not maintain effective internal control over financial reporting (including safeguarding assets) and compliance with significant laws and regulations as of September 30, 2006. While agencies have made significant progress in collecting the data elements from their real property inventory databases for the FRPP, data reliability is still a problem at some of the major real property-holding agencies and agencies lack a standard framework for assessing the validity of data used to populate the FRPP. Quality governmentwide and agency- specific data are critical for addressing the wide range of problems facing the government in the real property area, including excess and unneeded property, deterioration, and security concerns. Despite the progress made by the administration and individual agencies in recent years, decision makers historically have not had access to complete, accurate, and timely data on what real property assets the government owns; their value; whether the assets are being used efficiently; and what overall costs are involved in preserving, protecting, and investing in them. Also, real property-holding agencies have not been able to easily identify excess or unneeded properties at other agencies that may suit their needs. For example, in April 2006, the DOD Inspector General (IG) reported weaknesses in the control environment and control activities that led to deficiencies in the areas of human capital assets, knowledge management, and compliance with policies and procedures related to real property management. As a result, the military departments' real property databases were inaccurate, jeopardizing internal control over transactions reported in the financial statements. Compounding these issues is the difficulty each agency has in validating its real property inventory data that are submitted to FRPP. Validation of individual agencies' data is important because the data are used to populate the FRPP. Because a reliable FRPP is needed to advance the administration's real property initiative, ensuring the validity of data that agencies provide is critical. In general, we found that agencies' efforts to validate the data for the FRPP are at the very early stages of development. For example, according to Interior officials, the department had designed and was to begin implementing a program of validating, monitoring, and improving the quality of data reported into FRPP in the last quarter of fiscal year 2006. Furthermore, according to OMB staff, there is no comprehensive review or validation of data once agencies submit their real property profile data to OMB. OMB staff reported that both OMB and GSA review agency data submissions for variances from the prior reporting period. However, agencies are required to validate their data prior to submission to the GSA- managed database. OMB staff reported that some agencies, as part of the PMA initiative, have provided OMB with plans for ensuring the quality of their inventory and performance data. OMB staff reported that OMB has not, to date, requested these plans of all agencies. OMB staff reported that agencies provide OMB with information that includes the frequency of data updates and any methods used for data validation. In addition, according to OMB staff, OMB relies on the quality assurance and quality control processes performed by individual agencies. Also, OMB staff noted that they rely on agency IGs, agency financial statements, and our reviews to establish the validity of the data. Furthermore, OMB staff indicated that a one-size-fits-all approach to data validation would be difficult to implement. Nonetheless, a general framework for data validation that could guide agencies in this area would be helpful, as agencies continue their efforts to populate the FRPP with data from their existing data systems. A framework for FRPP data validation approaches could be used in conjunction with the more ad hoc validation efforts OMB mentioned to, at a minimum, suggest standards for frequency of validation, validation methods, error tolerance, and reporting on reliability. Such a framework would promote a more comprehensive approach to FRPP data validation. In our recent report, we recommended that OMB, in conjunction with the FRPC, develop a framework that agencies can use to better ensure the validity and usefulness of key real property data in the FRPP. The threat of terrorism has increased the emphasis on physical security for federal real property assets. All of the nine agencies reported using risk-based approaches to some degree to prioritize facility security needs, as we have suggested; but some agencies cited challenges, including a lack of resources for security enhancements and issues associated with securing leased space. For example, DHS officials reported that the department is working to further develop a risk management approach that balances security requirements and the acquisition of real property and leverages limited resources for all its components. In many instances, available real property requires security enhancements before government agencies can occupy the space. Officials reported that these security upgrades require funding that is beyond the cost of acquiring the property, and, therefore, their acquisition is largely dependent on the availability of sufficient resources. While some agencies have indicated that they have made progress in using risk-based approaches, some officials told us that they still face considerable challenges in balancing their security needs and other real property management needs with their limited resources. According to GSA officials, obtaining funding for security countermeasures, both security fixtures and equipment, is a challenge, not only within GSA, but for GSA's tenant agencies as well. In addition, Interior and NASA officials reported that their agencies face budget and resource constraints in securing real property. Interior officials further noted that despite these limitations, incremental progress is made each year in security. Given their competing priorities and limited security resources, some of the major real property-holding agencies face considerable challenges in balancing their security and real property management needs. We have reported that agencies could benefit from specific performance measurement guidance and standards for facility protection to help them address the challenges they face and help ensure that their physical security efforts are achieving the desired results. Without a means of comparing the effectiveness of security measures across facilities, particularly program outcomes, the U.S. government is open to the risk of either spending more money for less effective physical security measures or investing in the wrong areas. Furthermore, performance measurement helps ensure accountability, since it enables decision makers to isolate certain activities that are hindering an agency's ability to achieve its strategic goals. Performance measurement can also be used to prioritize security needs and justify investment decisions so that an agency can maximize available resources. Despite the magnitude of the security problem, we noted that this area is largely unaddressed in the real property initiative. Without formally addressing security, there is a risk that this challenge could continue to impede progress in other areas. The security problem has an impact on the other problems that have been discussed. For example, to the extent that funding will be needed for a sustained investment in security, the funding available for repair and restoration, preparing excess property for disposal, and improving real property data systems may be further constrained. Furthermore, security requires significant staff time and other human capital resources and thus real property managers may have less time to manage other problems. In past high-risk reports, we called for a transformation strategy to address long-standing real property problems. While the administration's current approach is generally consistent with what we envisioned and the administration's central focus on real property management is a positive step, certain areas warrant further attention. Specifically, problems are exacerbated by underlying obstacles that include competing stakeholder interests and legal and budgetary limitations. For example, some agencies cited local interests as barriers to disposing of excess property. In addition, agencies' limited ability to pursue ownership often leads them to lease property that they could more cost-effectively own over time. Another obstacle--the need for improved long-term capital planning-- remains despite OMB efforts to enhance related guidance. Some major real property-holding agencies reported that competing local, state, and political interests often impede their ability to make real property management decisions, such as decisions about disposing of unneeded property and acquiring real property. For example, VA officials reported that disposal is often not an option for most properties because of political stakeholders and constituencies, including historic building advocates or local communities that want to maintain their relationship with VA. In addition, VA officials said that attaining the funding to follow through on Capital Asset Realignment for Enhanced Services (CARES) decisions is a challenge because of competing priorities. Also, Interior officials reported that the department faces significant challenges in balancing the needs and concerns of local and state governments, historical preservation offices, political interests, and others, particularly when coupled with budget constraints. Other agencies cited similar challenges related to competing stakeholder interests. If the interests of competing stakeholders are not appropriately addressed early in the planning stage, they can adversely affect the cost, schedule and scope of a project. Despite its significance, the obstacle of competing stakeholder interests has gone unaddressed in the real property initiative. It is important to note that there is precedent for lessening the impact of competing stakeholder interests. BRAC decisions, by design, are intended to be removed from the political process, and Congress approves BRAC decisions as a whole. OMB staff said they recognize the significance of the obstacle and told us that FRPC would begin to address the issue after the inventory is established and other reforms are initiated. Without addressing this issue, however, less than optimal decisions that are not based on what is best for the government as a whole may continue. As discussed earlier, budgetary limitations that hinder agencies' ability to fund ownership leads agencies to rely on costly leased space to meet new space needs. Furthermore, the administrative complexity and costs of disposing of federal property continue to hamper some agencies' efforts to address their excess and underutilized real property problems. Federal agencies are required by law to assess and pay for any environmental cleanup that may be needed before disposing of a property--a process that may require years of study and result in significant costs. As valuable as these legal requirements are, their administrative complexity and the associated costs of complying with them create disincentives to the disposal of excess property. For example, we reported that VA, like all federal agencies, must comply with federal laws and regulations governing property disposal that are intended, for example, to protect subsequent users of the property from environmental hazards and to preserve historically significant sites. We have reported that some VA managers have retained excess property because the administrative complexity and costs of complying with these requirements were disincentives to disposal. Additionally, some agencies reported that the costs of cleanup and demolition sometimes exceed the costs of continuing to maintain a property that has been shut down. In such cases, in the short run, it can be more beneficial economically to retain the asset in a shut-down status. Given that agencies are required to fund the costs of preparing property for disposal, the inability to retain any of the proceeds acts as an additional disincentive. It seems reasonable to allow agencies to retain enough of the proceeds to recoup the costs of disposal, and it may make sense to permit agencies to retain additional proceeds for reinvestment in real property where a need exists. However, in considering whether to allow federal agencies to retain proceeds from real property transactions, it is important for Congress to ensure that it maintains appropriate control and oversight over these funds, including the ability to redistribute the funds to accommodate changing needs. In our recent report, we recommended that OMB, in conjunction with the FRPC, develop an action plan for how the FRPC will address key problems, including the continued reliance on costly leasing in cases where ownership is more cost effective over the long term, the challenges of securing real property assets, and reducing the effect of competing stakeholder interests on businesslike outcomes in real property decisions. Over the years, we have reported that prudent capital planning can help agencies to make the most of limited resources, and failure to make timely and effective capital acquisitions can result in acquisitions that cost more than anticipated, fall behind schedule, and fail to meet mission needs and goals. In addition, Congress and OMB have acknowledged the need to improve federal decision making regarding capital investment. A number of laws enacted in the 1990s placed increased emphasis on improving capital decision-making practices and OMB's Capital Programming Guide and its revisions to Circular A-11 have attempted to address the government's shortcomings in this area. Our prior work assessing agencies' implementation of the planning phase principles in OMB's Capital Programming Guide and our Executive Guide found that some agencies' practices did not fully conform to the OMB principles, and agencies' implementation of capital planning principles was mixed. Specifically, while agencies' capital planning processes generally linked to their strategic goals and objectives and most of the agencies we reviewed had formal processes for ranking and selecting proposed capital investments, the agencies have had limited success with using agencywide asset inventory systems and data on asset condition to identify performance gaps. In addition, we found that none of the agencies had developed a comprehensive, agencywide, long-term capital investment plan. The agency capital investment plan is intended to explain the background for capital decisions and should include a baseline assessment of agency needs that examines existing assets and identifies gaps and help define an agency's long-term investment decisions. In January 2004, we recommended that OMB begin to require that agencies submit long-term capital plans to OMB. Since that report was issued, VA-- which was one of our initial case study agencies--issued its first 5-year capital plan. However, the results of follow-up work in this area showed that although OMB now encourages such plans, it does not collect them, and the agencies that were included in our follow-up review do not have agency wide long-term capital investment plans. OMB agreed that there are benefits from OMB review of agency long-term capital plans, but that these plans should be shared with OMB on an as-needed basis depending on the specific issue being addressed and the need to view supporting materials. Shortcomings in the capital planning and decision-making area have clear implications for the administration's real property initiative. Real property is one of the major types of capital assets that agencies acquire. Other capital assets include information technology, major equipment, and intellectual property. OMB staff said that agency asset management plans are supposed to align with the capital plans but that OMB does not assess whether the plans are in alignment. We found that guidance for the asset management plans does not discuss how these plans should be linked with agencies' broader capital planning efforts outlined in the Capital Programming Guide. In fact, OMB's asset management plan sample, referred to as the "shelf document," which agencies use to develop the asset management plans, makes no reference to the guide. Without a clear linkage or crosswalk between the guidance for the two documents, there is less assurance that agencies will link them. Furthermore, there could be uncertainty with regard to how real property goals specified in the asset management plans relate to longer term capital plans. The executive order on real property management and the addition of real property to the PMA have provided a good foundation for strategically managing federal real property and addressing long-standing problems. These efforts directly address the concerns we raised in past high-risk reports about the lack of a governmentwide focus on real property management problems and generally constitute what we envisioned as a transformation strategy for this area. However, these efforts are in the early stages of implementation, and the problems that led to the high-risk designation--excess property, repair backlogs, data issues, reliance on costly leasing, and security challenges--still exist. As a result, this area remains high risk until agencies show significant results in eliminating the problems by, for example, reducing inventories of excess facilities and making headway in addressing the repair backlog. Furthermore, the current efforts lack an overall framework for helping agencies ensure the validity of real property data in FRPP and do not adequately address the costliness of long-term leases and security challenges. While the administration has taken several steps to overcome some obstacles in the real property area, the obstacle posed by competing stakeholder interests has gone largely unaddressed, and the linkage between the real property initiative and broader agency capital planning efforts is not clear. Focusing on these additional areas could help ensure that the problems and obstacles are addressed. We made three recommendations to OMB's Deputy Director for Management in our April 2007 report on real property high risk issues. OMB agreed with the report and concurred with its recommendations. We recommended that the Deputy Director, in conjunction with FRPC, develop a framework that agencies can use to better ensure the validity and usefulness of key real property data in the FRPP. At a minimum, the framework would suggest standards for frequency of validation methods, error tolerance, and reporting on reliability. OMB agreed with our recommendation and reported that it will work with the FRPC to take steps to establish and implement a framework. For our second recommendation to develop an action plan for how the FRPC will address key problems, OMB said that the FRPC is currently drafting a strategic plan for addressing long-standing issues such as the continued reliance on costly leasing in cases where ownership is more cost effective over the long-term, the challenge of securing real property assets, and reducing the effect of competing stakeholder interests on businesslike outcomes in real property decisions. OMB agreed that it is important to build upon the substantial progress that has been realized by both the FRPC and the federal real property community in addressing the identified areas for improvement. OMB said that it will share the strategic plan with us once it is in place and will discuss strategies for ensuring successful implementation. For our third recommendation to establish a clearer link or crosswalk between agencies' efforts under the real property initiative and broader capital planning guidance, OMB stated that as agencies update their asset management plans and incorporate updated guidance on capital planning, progressive improvement in this area will be realized. 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 on this testimony, please contact Mark Goldstein on (202) 512-2834 or at [email protected]. Key contributions to this testimony were made by Anne Izod, Susan Michal-Smith, and David Sausville. 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 January 2003, GAO designated federal real property as a high-risk area due to long-standing problems with excess and underutilized property, deteriorating facilities, unreliable real property data, and costly space challenges. Federal agencies were also facing many challenges protecting their facilities due to the threat of terrorism. This testimony is based largely on GAO's April 2007 report on real property high-risk issues (GAO-07-349). The objectives of that report were to determine (1) what progress the administration and major real property-holding agencies had made in strategically managing real property and addressing long-standing problems and (2) what problems and obstacles, if any, remained to be addressed. The administration and real property-holding agencies have made progress toward strategically managing federal real property and addressing long-standing problems. In response to the President's Management Agenda real property initiative and a related executive order, agencies have, among other things, established asset management plans; standardized data reporting; and adopted performance measures. Also, the administration has created a Federal Real Property Council (FRPC) and plans to work with Congress to provide agencies with tools to better manage real property. These are positive steps, but underlying problems still exist. For example, the Departments of Energy (Energy) and Homeland Security (DHS) and the National Aeronautics and Space Administration (NASA) reported that over 10 percent of their facilities are excess or underutilized. Also, Energy, NASA, the General Services Administration (GSA), and the Departments of the Interior (Interior), State (State), and Veterans Affairs (VA) reported repair and maintenance backlogs for buildings and structures that total over $16 billion. The Department of Defense (DOD) reported a $57 billion restoration and modernization backlog. Also, Energy, Interior, GSA, State, and VA reported an increased reliance on leasing to meet space needs. While agencies have made progress in collecting and reporting standardized real property data, data reliability is still a challenge at DOD and other agencies, and agencies lack a standard framework for data validation. Finally, agencies reported using risk-based approaches to prioritize security needs, which GAO has suggested, but some cited obstacles such as a lack of resources for security enhancements. In past high-risk updates, GAO called for a transformation strategy to address the long-standing problems in this area. While the administration's approach is generally consistent with what GAO envisioned, certain areas warrant further attention. Specifically, problems are exacerbated by underlying obstacles that include competing stakeholder interests, legal and budgetary limitations, and the need for improved capital planning. For example, agencies cited local interests as barriers to disposing of excess property, and agencies' limited ability to pursue ownership leads them to lease property that may be more cost-effective to own over time.

By 1986, recruit quality was at historically high levels. All services had met or exceeded their overall enlistment objectives for percentages of recruits who held high school diplomas and scored in the top categories on the test taken to qualify for military service. Specifically, the percentage of recruits with high school diplomas increased from 72 percent during the 1964-73 draft period to 92 percent in 1986. Also, 64 percent of new recruits in 1986 scored in the upper 50th percentile of the Armed Forces Qualification Test, up from 38 percent in 1980. The services' success in recruiting high quality enlistees continued through the 1980s and into the 1990s, with the percentage of high school graduates reaching a high of 99 percent in 1992 and the percentage of those scoring in the upper half of the Armed Forces Qualification Test peaking in 1991 at 75 percent. Studies of attrition have consistently shown that persons with high school diplomas and Armed Forces Qualification Test scores in the upper 50th percentile have lower first-term attrition rates. For example, for those who entered the services in fiscal year 1992 and had high school diplomas, the attrition rate was 33.1 percent. For persons with 3 or 4 years of high school and no diploma, the rate was 38.9 percent; and for those with General Education Development certificates, the attrition rate was 46.3 percent. Similarly, those who scored in the highest category, category I, of the Armed Forces Qualification Test had an attrition rate of 24.7 percent, and those in category IVA had a rate of 40.7 percent. Increases in the quality of DOD's recruits since the 1970s, coupled with the lower attrition rates of those considered "high quality" recruits, logically should have resulted in lower first-term attrition rates throughout the services. However, factors other than education and Armed Forces Qualification Test scores appear to be influencing the early separation of recruits. First-term enlisted attrition has remained at 29 to 39 percent since 1974. For enlistees who entered the services in fiscal year 1992, first-term attrition was 33.2 percent. The Army's attrition was the highest of all the services, at 35.9 percent, followed by the Marine Corps at 32.2 percent, the Navy at 32 percent, and the Air Force at 30 percent. The highest portion of attrition occurs during the early months of enlistees' first terms. Of enlistees who entered the services in fiscal year 1992, 11.4 percent were separated in their first 6 months of service. Attrition was fairly evenly distributed over the remaining period of enlistees' first terms. The rate was 3.4 percent for those with 7 to 12 months of service, 7.3 percent for those with 13 to 24 months of service, 6 percent for those with 25 to 36 months of service, and 5 percent for those with 37 to 48 months of service. On the basis of DOD-provided cost data, we estimated that in fiscal year 1996, DOD and the services spent about $390 million to enlist personnel who never made it to their first duty stations. Of this total cost, which includes the cost of DOD's training and recruiting infrastructure, about $4,700 was spent to transport each recruit to basic training; to pay, feed, house, and provide medical care for the recruit while at basic training; and to transport the separated recruit home. We estimated that if the services could reduce their 6-month enlisted attrition by 10 percent, their short-term savings would be $12 million, and their long-term savings could be as high as $39 million. DOD and the services need a better understanding of the reasons for early attrition to identify opportunities for reducing it. Currently, available data on attrition does not permit DOD to pinpoint the precise reasons that enlistees are departing before completing their training. While the data indicates general categories of enlisted separations based on the official reasons for discharge, it does not provide DOD and the services with a full understanding of the factors contributing to the attrition. For example, of the 25,430 enlistees who entered the services in fiscal year 1994 and were discharged in their first 6 months, the data showed 7,248 (or 29 percent) had failed to meet minimum performance criteria, 6,819 (or 27 percent) were found medically unqualified for military service, 3,643 (or 14 percent) had character or behavior disorders, and 3,519 (or 14 percent) had fraudulently entered the military. These figures were based on data maintained by the Defense Manpower Data Center and collected from servicemembers' DD-214 forms, which are their official certificates of release or discharge from active duty. Because the services interpret the separation codes that appear on the forms differently and because only the official reason for the discharge is listed, the Data Center's statistics can be used only to indicate general categories of separation. Therefore, DOD does not have enough specific information to fully assess trends in attrition. In an attempt to standardize the services' use of these codes, DOD issued a list of the codes with their definitions. However, it has not issued implementing guidance for interpreting these definitions, and the services' own implementing guidance differs on several points. For example, if an enlistee intentionally withholds medical information that would disqualify him or her and is then separated for the same medical condition, the enlistee is discharged from the Air Force and the Marine Corps for a fraudulent enlistment. The Army categorizes this separation as a failure to meet medical/physical standards unless it can prove that the enlistee withheld medical information with the intent of gaining benefits. The Air Force and the Marine Corps do not require this proof of intent. The Navy categorizes this separation as an erroneous enlistment, which indicates no fault on the part of the enlistee. To enable DOD and the services to more completely analyze the reasons for attrition and to set appropriate targets for reducing it, we recommended that DOD issue implementing guidance for how the services should apply separation codes to provide a reliable database on reasons for attrition. In the absence of complete data on why first-term attrition is occurring, we examined the various pre-enlistment screening processes that correspond to the types of separations that were occurring frequently. For example, because a significant number of enlistees were being separated for medical problems and for fraudulent entry, we focused our work on recruiting and medical examining processes that were intended to detect problems before applicants are enlisted. These processes involve many different military personnel. Recruiters, staff members at the Military Entrance Processing Stations, drill instructors at basic training, instructors at follow-on technical training schools, and duty-station supervisors are all involved in transforming civilians into productive servicemembers. The process begins when the services first identify and select personnel to serve as recruiters. It continues when recruiters send applicants to receive their mental and physical examinations at the Military Entrance Processing Stations, through the period of up to 1 year while recruits remain in the Delayed Entry Program, and through the time recruits receive their basic and follow-on training and begin work in their first assignments. Reexamining the roles of all persons involved in this continuous process is in keeping with the intent of the Government Performance and Results Act of 1993, which requires agencies to clearly define their missions, to set goals, and to link activities and resources to those goals. Recruiting and retaining well-qualified military personnel is among the goals included in DOD's strategic plan required under this act. As a part of this reexamination, we have found that recruiters did not have adequate incentives to ensure that their recruits were qualified and that the medical screening processes did not always identify persons with preexisting medical conditions. We believe that the services should not measure recruiting success simply by the number of recruits who sign enlistment papers stating their intention to join a military service but also by the number of new recruits who go on to complete basic training. We also believe that the services' mechanisms for medically screening military applicants could be improved. We found that recruiters did not have adequate incentives to ensure that their recruits were qualified. Accordingly, we have identified practices in each service that we believe would enhance recruiters' performance and could be expanded to other services. Specifically, in our 1998 report on military recruiting, we reported that the services were not optimizing the performance of their recruiters for the following reasons: The Air Force was the only service that required personnel experienced in recruiting to interview candidates for recruiter positions. In contrast, many Army and some Marine recruiting candidates were interviewed by personnel in their chain of command who did not necessarily have recruiting experience. The Navy was just beginning to change its recruiter selection procedures to resemble those of the Air Force. The Air Force was the only service that critically evaluated the potential of candidates to be successful recruiters by judging their ability to communicate effectively and by using a screening test. The Army, the Marine Corps, and the Navy tended to focus more on candidates' past performance in nonrecruiting positions. Only the Marine Corps provided recruiter trainees with opportunities to interact with drill instructors and separating recruits to gain insight into ways to motivate recruits in the Delayed Entry Program. This interaction was facilitated by the Marine Corps' collocation of the recruiter school with one of its basic training locations. Only the Marine Corps conducted regular physical fitness training for recruits who were waiting to go to basic training, though all of the services gave recruits in the Delayed Entry Program access to their physical fitness facilities and encouraged recruits to become or stay physically fit. Only the Marine Corps required all recruits to take a physical fitness test before reporting to basic training, though it is well known that recruits who are not physically fit are less likely to complete basic training. Only the Marine Corps' and the Navy's incentive systems rewarded recruiters when their recruits successfully completed basic training. The Army and the Air Force focused primarily on the number of recruits enlisted or the number who reported to basic training. Recruiters in all of the services generally worked long hours, were able to take very little leave, and were under almost constant pressure to achieve their assigned monthly goals. A 1996 DOD recruiter satisfaction survey indicated that recruiter success was at an all-time low, even though the number of working hours had increased to the highest point since 1989. For example, only 42 percent of the services' recruiters who responded to the survey said that they had met assigned goals for 9 or more months in the previous 12-month period. To improve the selection of recruiters and enhance the retention of recruits, we recommended that the services (1) use experienced field recruiters to personally interview all potential recruiters, use communication skills as a key recruiter selection criterion, and develop or procure personality screening tests that can aid in the selection of recruiters; (2) emphasize the recruiter's role in reducing attrition by providing opportunities for recruiter trainees to interact with drill instructors and separating recruits; (3) encourage the services to incorporate more structured physical fitness training for recruits into their Delayed Entry Programs; (4) conduct physical fitness tests before recruits report to basic training; (5) link recruiter rewards more closely to recruits' successful completion of basic training; and (6) encourage the use of quarterly floating recruitment goals as an alternative to the services' current systems of monthly goals. We have also found areas in which the medical screening of enlistees could be improved. Specifically, DOD's medical screening processes did not always identify persons with preexisting medical conditions, and DOD and the services did not have empirical data on the cost-effectiveness of waivers or medical screening tests. In summary, the services did not have adequate mechanisms in place to increase the likelihood that the past medical histories of prospective recruits would be accurately reported; DOD's system of capturing information on medical diagnoses did not allow it to track the success of recruits who received medical waivers; the responsibility for reviewing medical separation cases to determine whether medical conditions should have been detected at the Military Entrance Processing Stations resided with the Military Entrance Processing Command, the organization responsible for the medical examinations; and the Navy and the Marine Corps did not test applicants for drugs at the Military Entrance Processing Stations but waited until they arrived at basic training. To improve the medical screening process, we recommended that DOD (1) require all applicants for enlistment to provide the names of their medical insurers and providers and sign a release form allowing the services to obtain past medical information; (2) direct the services to revise their medical screening forms to ensure that medical questions for applicants are specific, unambiguous, and tied directly to the types of medical separations most common for recruits during basic and follow-on training; (3) use a newly proposed DOD database of medical diagnostic codes to determine whether adding medical screening tests to the examinations given at the Military Entrance Processing Stations and/or providing more thorough medical examinations to selected groups of applicants could cost-effectively reduce attrition at basic training; (4) place the responsibility for reviewing medical separation files, which resided with the Military Entrance Processing Command, with an organization completely outside the screening process; and (5) direct all services to test applicants for drugs at the Military Entrance Processing Stations. In its National Defense Authorization Act for Fiscal Year 1998 (P.L. 105-85), the Congress adopted all recommendations contained in our 1997 report on basic training attrition, except for our recommendation that all the services test applicants for drug use at the Military Entrance Processing Stations, which the services had already begun to do. Specifically, the act directed DOD to, among other things, (1) strengthen recruiter incentive systems to thoroughly prescreen candidates for recruitment, (2) include as a measurement of recruiter performance the percentage of persons enlisted by a recruiter who complete initial combat training or basic training, (3) improve medical prescreening forms, (4) require an outside agency or contractor to annually assess the effectiveness of the Military Entrance Processing Command in identifying medical conditions in recruits, (5) take steps to encourage enlistees to participate in physical fitness activities while they are in the Delayed Entry Program, and (6) develop a database for analyzing attrition. The act also required the Secretary of Defense to (1) improve the system of pre-enlistment waivers and assess trends in the number and use of these waivers between 1991 and 1997; (2) ensure the prompt separation of recruits who are unable to successfully complete basic training; and (3) evaluate whether partnerships between recruiters and reserve components, or other innovative arrangements, could provide a pool of qualified personnel to assist in the conduct of physical training programs for new recruits in the Delayed Entry Program. DOD and the services have taken many actions in response to our recommendations and the requirements in the Fiscal Year 1998 Defense Authorization Act. However, we believe that it will be some time before DOD sees a corresponding drop in enlisted attrition rates, and we may not be able to precisely measure the effect of each particular action. While we believe that DOD's and the services' actions combined will result in better screening of incoming recruits, we also believe that further action is needed. As of January 1998, DOD reported that the following changes have been made in response to the recommendations in our 1997 report: (1) the Military Entrance Processing Command is formulating procedures to comply with the new requirement to obtain from military applicants the names of their medical insurers and health care providers; (2) the Accession Medical Standards Working Group has created a team to evaluate the Applicant Medical Prescreening Form (DD Form 2246); (3) DOD has adopted the policy of using codes from the International Classification of Diseases on all medical waivers and separations and plans to collect this information in a database that will permit a review of medical screening policies; (4) DOD plans to form a team made up of officials from the Office of the Assistant Secretary of Defense (Health Affairs) and the Office of Accession Policy to conduct semiannual reviews of medical separations; and (5) all services are now testing applicants for drugs at the Military Entrance Processing Stations. We believe that these actions should help to improve the medical screening of potential recruits and result in fewer medical separations during basic training. In its response to our 1998 report on recruiting, DOD stated that it concurred with our recommendations and would take action to (1) develop or procure assessment tests to aid in the selection of recruiters and (2) link recruiter rewards more closely to recruits' successful completion of basic training. The Office of the Assistant Secretary of Defense for Force Management Policy is planning to work with the services to evaluate different assessment screening tests. This office will also ensure that all services incorporate recruits' success in basic training to recruiter incentive systems. We understand that DOD plans to form a joint service working group to address the legislative requirements enacted in the National Defense Authorization Act for Fiscal Year 1998. Specifically, the working group will be tasked with devising a plan to satisfy the legislative requirements for DOD and the services to (1) improve the system of separation codes, (2) develop a reliable database for analyzing reasons for attrition, (3) adopt or strengthen incentives for recruiters to prescreen applicants, (4) assess recruiters' performance in terms of the percentage of their enlistees who complete initial combat training or basic training, (5) assess trends in the number and use of waivers, and (6) implement policies and procedures to ensure the prompt separation of recruits who are unable to complete basic training. We believe that the steps DOD and the services have taken thus far could do much to reduce attrition. It appears that the soon-to-be-formed joint service working group can do more. As the group begins its work, we believe that it needs to address the following six areas in which further action is needed. First, we believe that DOD's development of a database on medical separations is a necessary step to understanding the most prevalent reasons for attrition. However, we believe that DOD needs to develop a similar database on other types of separations. Until DOD has uniform and complete information on why recruits are being separated early, it will have no basis for determining how much it can reduce attrition. Also, in the absence of the standardized use of separation codes, cross-service comparisons cannot be made to identify beneficial practices in one service that might be adopted by other services. Second, we believe that all the services need to increase emphasis on the use of experienced recruiters to personally interview all potential recruiters or explore other options that would produce similar results. DOD agreed with the general intent of this recommendation but stated that it is not feasible in the Army due to the large number of men and women who are selected annually for recruiting duty and to the geographic diversity in their assignments. While it may be difficult for the Army to use field recruiters to interview 100 percent of its prospective recruiters, we continue to believe that senior, experienced recruiters have a better understanding of what is required for recruiting duty than operational commanders. Third, we believe that an ongoing dialogue between recruiters and drill instructors is critical to enhancing recruiters' understanding of problems that lead to early attrition. DOD concurred with our recommendation to have recruiter trainees meet with drill instructors and recruits being separated or held back due to poor physical conditioning. However, the Air Force has no plans to change its policy of devoting only 1 hour of its recruiter training curriculum to a tour of its basic training facilities. We believe this limited training falls short of the intent of our recommendation. Fourth, we believe that the services should incorporate more structured physical fitness training into their Delayed Entry Programs. All the services are encouraging their recruits to become physically fit, but there are concerns about the services' liability should recruits be injured while they are awaiting basic training. DOD is currently investigating the extent to which medical care can be provided for recruits who are injured while in the Delayed Entry Program. Fifth, we believe that, like the Marine Corps, the other services should administer a physical fitness test to recruits before they are sent to basic training. DOD concurred with this recommendation, and the Army is in the process of implementing it. The Navy and the Air Force, however, do not yet have plans to administer a physical fitness test to recruits in the Delayed Entry Program. Finally, we continue to believe that the services need to use quarterly floating goals for their recruiters. DOD did not fully concur with our recommendation on quarterly floating goals. DOD believes that floating quarterly goals would reduce the services' ability to make corrections to recruiting difficulties before they become unmanageable. We believe, however, that using floating quarterly goals would not prevent the services from managing their accessions. The floating quarterly goals we propose would not be static. Each recruiter's goals would simply be calculated based on a moving 3-month period. This floating goal would continue to provide recruiting commands with the ability to identify recruiting shortfalls in the first month that they occur and to control the flow of new recruits into the system on a monthly basis. At the same time, such a system has the potential of providing recruiters with some relief from the problems that were identified in the most recent recruiter satisfaction survey. Mr. Chairman, this concludes my prepared statement. We would be happy to respond to any questions that you or the other Members of the Subcommittee may have. The first copy of each GAO report and testimony is free. Additional copies are $2 each. Orders should be sent to the following address, accompanied by a 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. 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GAO discussed its work on the attrition and recruiting of the military services' enlisted personnel, focusing on: (1) the historical problem of attrition and its costs; (2) the Department of Defense's (DOD) lack of complete data on why enlistees are being separated early; (3) GAO's recommendations on ways to improve the screening of recruiters and recruits; and (4) DOD's actions thus far to respond to GAO's recommendations. GAO noted that: (1) despite increases in the quality of DOD's enlistees, about one-third of all new recruits continue to leave the military service before they fulfill their first term of enlistment; (2) this attrition rate is costly in that the services must maintain infrastructure to recruit and train around 200,000 persons per year; (3) solving the problem of attrition will not be simple in large part because DOD does not have complete data on why enlisted personnel are being separated; (4) in GAO's work, it has concentrated on what it has found to be major categories of separation, such as medical problems and fraudulent enlistments; (5) because these types of separations involve services' entire screening processes, GAO has reexamined these processes from the time recruiters are selected, through the time that applicants are prescreened by recruiters, through the medical examinations applicants undergo, and through physical preparation of recruits for basic training; (6) the process of attracting quality recruits and retaining them involves many service entities and many processes; (7) GAO has recommended ways to improve the: (a) data DOD collects to analyze reasons for attrition; (b) services' criteria for selecting recruiters; (c) incentive systems for recruiters to enlist persons who will complete basic training; and (d) services' mechanisms for identifying medical problems before recruits are enlisted; (8) many of these recommendations have been incorporated into the National Defense Authorization Act for Fiscal Year 1998; (9) DOD and the services have already taken some positive steps in response to GAO's recommendations and the National Defense Authorization Act; and (10) however, GAO believes that DOD needs to take further action to change the criteria by which recruiters are selected, provide recruiters with more opportunities to interact with drill instructors, and revise recruiters' incentive systems to improve their quality of life.

While NARA's fiscal year 2011 expenditure plan meets four of the six legislative conditions, the lack of critical capital planning and oversight steps--including documentation demonstrating approval of significant changes to a recent ERA increment, post-implementation reviews of deployed capabilities, and OMB's approval of the expenditure plan--limits NARA's ability to ensure that the system is being implemented at an acceptable cost and within expected time frames and contributes to observable improvements in mission performance. These issues are further exacerbated by the agency's partial implementation of several open GAO recommendations, such as those related to improving investment oversight and earned value processes. With significant weaknesses in many basic oversight and management processes, as well as continued delays in completing Increment 3, NARA's ability to make significant development progress in the remainder of the fiscal year will be challenged. In addition, without a reliable ERA expenditure plan, NARA has not provided adequate information to assist congressional oversight and informed decision making related to the use of appropriated funds. When these weaknesses are combined with the lack of prioritization of the remaining requirements under negotiation for fiscal year 2011, Congress has little assurance that additional funds allocated to ERA will result in significant benefits to potential users. With OMB's direction to stop development after 2011, it is unclear whether NARA will be able to effectively address the full range of weaknesses we identified and still have adequate time to complete significant development efforts. The identified deficiencies in NARA's expenditure plan and management of the ERA acquisition make it unclear whether NARA can make substantial progress in delivering additional ERA system capabilities that justify its planned investment by the end of fiscal year 2011. As such, we suggest that Congress consider employing an accountability mechanism that limits NARA's ability to use funds appropriated for ERA development until NARA implements an adequate capital planning and investment control process, updates its expenditure plan to clearly describe what system capabilities and benefits are to be delivered in fiscal year 2011, and establishes an associated set of prioritized system requirements and adequate earned value reporting. We are recommending that the Archivist of the United States immediately take the following two actions while the current system development contract is active: Report to Congress on the specific outcomes to be achieved with the balance of any previous multiyear funds in fiscal year 2011. Ensure that the ERA requirements planned for fiscal year 2011 are fully prioritized so that those most critical to NARA's customers and other stakeholders are addressed. To ensure that any future efforts are completed within reasonable funding and time constraints, we are recommending that the Archivist of the United States take the following four actions: Ensure that significant changes to ERA's program's cost, schedule, and scope are approved through NARA's investment review process. Conduct post-implementation reviews of deployed ERA capabilities to validate estimated benefits and costs. Submit ERA expenditure plans to OMB for review and approval prior to submitting to Congress. Update the ERA Requirements Management Plan and related guidance to mandate requirements prioritization throughout the project's life-cycle. In written comments on a draft of this report, which are reprinted in appendix II, the Archivist of the United States concurred with our six recommendations. Specifically, he stated that NARA has sufficiently addressed the first two recommendations. He further stated that NARA would be unable to address the final four recommendations in a near-term action plan since those were specific to a future ERA development effort. The Archivist also noted that NARA is developing an addendum to the fiscal year 2011 expenditure plan to provide updated information on ERA requirements, costs, and the schedule of software releases. 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 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. On October 1, 2010, the agency submitted its fiscal year 2011 expenditure plan to the relevant House and Senate appropriations committees to support its request for $85.5 million in ERA funding. Of this amount, $61.8 million consists of multi-year funds allocated to ERA. In the expenditure plan, NARA also included support for requests at two alternative funding levels--$72.0 million and $61.4 million--based on congressional direction. Subsequently, on October 19, 2010, NARA submitted a summary of its expenditure plan to the appropriations committees that included revised requests at $72 million and $65 million funding levels. According to NARA, both the expenditure plan and the summary reflect fiscal year 2011 as the final year of ERA development. In addition to the individual named above, key contributions to this report were made by James R. Sweetman, Jr., Assistant Director; Monica Perez- Nelson; Eric Costello; Lee McCracken; Tarunkant Mithani; Karl Seifert; Jonathan Ticehurst; and Adam Vodraska.

Since 2001, the National Archives and Records Administration (NARA) has been working to develop an Electronic Records Archive (ERA) to preserve and provide access to massive volumes of all types of electronic records. NARA originally planned to complete the system in 2012, but has repeatedly revised the program schedule and estimated cost and is now planning to deploy an ERA system with reduced functionality by the end of fiscal year 2011. As required by the Consolidated Appropriations Act, 2010, and the Continuing Appropriations Act, 2011, NARA submitted an expenditure plan to Congress to support its request for fiscal year 2011 ERA funding. The legislation also requires that this plan meet six conditions, including review by GAO. GAO's objectives in reviewing the fiscal year 2011 plan were to (1) determine whether the plan satisfies legislative conditions, (2) determine the extent to which NARA has implemented prior GAO recommendations, and (3) provide any other observations on the plan or the ERA acquisition. To do this, GAO reviewed the expenditure plan and other agency documents and interviewed NARA officials. NARA's fiscal year 2011 expenditure plan satisfies four of the six legislative conditions and partially satisfies two. Specifically, it partially satisfies the condition that NARA meet requirements for reviewing the progress of capital investments, such as ERA. While NARA has held regular meetings with senior-level agency management to review ERA progress, these groups did not document approval of important schedule and scope changes, and NARA did not validate the estimated benefits and costs of deployed ERA capabilities. Further, NARA partially satisfies the condition that the expenditure plan be approved by NARA and the Office of Management and Budget (OMB). NARA approved the expenditure plan in October 2010, but the plan was not approved by OMB. Without approval from OMB, Congress will have limited assurance of the plan's reliability and accuracy. NARA has fully implemented one of GAO's four prior recommendations and partially implemented three. It implemented a recommendation to ensure that ERA's requirements are managed using a disciplined process by, for example, developing a process to keep requirements current. NARA partially implemented three other recommendations. First, to improve its executive-level oversight, NARA documented meetings to review ERA progress, but did not document approval of important changes to a recent phase, or increment, of the system. Second, NARA added information in its expenditure plan on ERA cost, schedule, and performance as recommended, but the plan lacks other key information, such as the estimated costs of an ongoing increment. Third, NARA documented a plan to strengthen its processes for measuring program progress, but continues to have weaknesses in this area, including not accurately portraying ERA program status. GAO has three observations on the expenditure plan and ERA acquisition: (1) The fiscal year 2011 expenditure plan does not provide a reliable basis for informed investment decision making. For example, NARA's cost estimates do not reliably reflect the work to be completed because of weaknesses in its supporting methodology, and the plan does not clearly show what functionality is planned to be delivered in the final year of development, by when, and at what cost. (2) NARA's expenditure plan does not address how remaining multiyear funds from fiscal year 2010 will be allocated. Specifically, NARA's plans for using the remaining $20.1 million are not discussed in the plan. (3) Although NARA recently updated the ERA requirements, the agency has not yet determined which of the requirements would be addressed before the end of development in fiscal year 2011 and has not fully prioritized the requirements to ensure that critical stakeholder needs will be met. Without a reliable expenditure plan and adequate management of the ERA acquisition, it is unclear whether NARA can make substantial progress in delivering additional system capabilities by the end of fiscal year 2011 to justify its planned investment. Congress should consider limiting funding of further ERA development until NARA addresses weaknesses in its oversight and management of the acquisition. GAO is also recommending actions for NARA to take to address these weaknesses. NARA concurred with GAO's recommendations.

Although the specific duties police officers perform may vary among police forces, federal uniformed police officers are generally responsible for providing security and safety to people and property within and sometimes surrounding federal buildings. There are a number of federal uniformed police forces operating in the Washington MSA, of which 13 had 50 or more officers as of September 30, 2001. Table 1 shows the 13 federal uniformed police forces included in our review and the number of officers in each of the police forces as of September 30, 2002. The enactment of the Homeland Security Act on November 25, 2002, had consequences for federal uniformed police forces. The act, among other things, established a new DHS, which includes 2 uniformed police forces within the scope of our review--the Federal Protective Service and the Secret Service Uniformed Division. Another component of DHS is TSA, a former component of the Department of Transportation. TSA includes the Federal Air Marshal Service, designed to protect domestic and international airline flights against hijacking and terrorist attacks. During fiscal year 2002, the Federal Air Marshal Program increased its recruiting significantly in response to the terrorist attacks of September 11, 2001. However, by fiscal year 2003, the buildup had been substantially completed. Because Federal Air Marshals are not limited to the grade and pay step structure of the federal government's General Schedule, TSA has been able to offer recruits higher compensation and more flexible benefit packages than many other federal police forces. Federal uniformed police forces operate under various compensation systems. Some federal police forces are covered by the General Schedule pay system and others are covered by different pay systems authorized by various laws. Since 1984, all new federal employees have been covered by the Federal Employees Retirement System (FERS). Federal police forces provide either standard federal retirement benefits or federal law enforcement retirement benefits. Studies of employee retention indicate that turnover is a complex and multifaceted problem. People leave their jobs for a variety of reasons. Compensation is often cited as a primary reason for employee turnover. However, nonpay factors, such as age, job tenure, job satisfaction, and job location, may also affect individuals' decisions to leave their jobs. During recent years, the federal government has implemented many human capital flexibilities to help agencies attract and retain sufficient numbers of high-quality employees to complete their missions. Human capital flexibilities can include actions related to such areas as recruitment, retention, competition, position classification, incentive awards and recognition, training and development, and work-life policies. We have stated in recent reports that the effective, efficient, and transparent use of human capital flexibilities must be a key component of agency efforts to address human capital challenges. The tailored use of such flexibilities for recruiting and retaining high-quality employees is an important cornerstone of our model of strategic human capital management. Eight of the 13 police forces reported difficulties recruiting officers from a moderate to a very great extent. Despite recruitment difficulties faced by many of the police forces, none of the police forces used important human capital recruitment flexibilities, such as recruitment bonuses and student loan repayments, in fiscal year 2002. Some police force officials reported that the human capital recruitment flexibilities were not used for various reasons, such as limited funding or that the flexibilities themselves were not available to the forces during the fiscal year 2002 recruiting cycle. Officials at 4 of the 13 police forces (Bureau of Engraving and Printing Police, the Federal Bureau of Investigation (FBI) Police, Federal Protective Service, and NIH Police) reported that they were having a great or very great deal of difficulty recruiting officers. In addition, officials at 5 police forces reported that they were having difficulty recruiting officers to a little or some extent or to a moderate extent. Among the reasons given for recruitment difficulties were: low pay; the high cost of living in the Washington, D.C., metropolitan area; difficulty completing the application/background investigation process; better retirement benefits at other law enforcement agencies. Conversely, officials at 4 of the 13 police forces (Library of Congress Police, the Supreme Court Police, U.S. Mint Police, and U.S. Postal Service Police) reported that they were not having difficulty recruiting officers. Library of Congress officials attributed their police force's lack of difficulty recruiting officers to attractive pay and working conditions and the ability to hire officers at any age above 20 and who also will not be subject to a mandatory retirement age. Supreme Court officials told us that their police force had solved a recent recruitment problem by focusing additional resources on recruiting and emphasizing the force's attractive work environment to potential recruits. U.S. Postal Service officials reported that their police force was not experiencing a recruitment problem because it hired its police officers from within the agency. Table 2 provides a summary of the level of recruitment difficulties reported by the 13 police forces. Although many of the police forces reported facing recruitment difficulties, none of the police forces used human capital recruitment tools, such as recruitment bonuses and student loan repayments, in fiscal year 2002. Total turnover at the 13 police forces nearly doubled from fiscal years 2001 to 2002. Additionally, during fiscal year 2002, 8 of the 13 police forces experienced their highest annual turnover rates over the 6-year period, from fiscal years 1997 through 2002. There were sizable differences in turnover rates among the 13 police forces during fiscal year 2002. NIH Police reported the highest turnover rate at 58 percent. The turnover rates for the remaining 12 police forces ranged from 11 percent to 41 percent. Of the 729 officers who separated from the 13 police forces in fiscal year 2002, about 82 percent (599), excluding retirements, voluntarily separated. About 53 percent (316) of the 599 officers who voluntarily separated from the police forces in fiscal year 2002 went to TSA. Additionally, about 65 percent of the officers who voluntarily separated from the 13 police forces during fiscal year 2002 had fewer than 5 years of service on their police forces. The total number of separations at all 13 police forces nearly doubled (from 375 to 729) between fiscal year 2001 and 2002. Turnover increased at all but 1 of the police forces (Library of Congress Police) over this period. The most significant increases in turnover occurred at the Bureau of Engraving and Printing Police (200 percent) and the Secret Service Uniformed Division (about 152 percent). In addition, during fiscal year 2002, 8 of the 13 police forces experienced their highest annual turnover rates over the 6-year period, from fiscal year 1997 through 2002. The turnover rates at the 13 police forces ranged from 11 percent at the Library of Congress Police to 58 percent at the NIH Police in fiscal year 2002. In addition to the NIH Police, 3 other police forces had turnover rates of 25 percent or greater during fiscal year 2002. The U.S. Mint Police reported the second highest turnover rate at 41 percent, followed by the Bureau of Engraving and Printing Police at 27 percent and the Secret Service Uniformed Division at 25 percent. There was no clear pattern evident between employee pay and turnover rates during fiscal year 2002. For example, while some police forces with relatively highly paid entry-level officers such as the Library of Congress Police (11 percent) and the Supreme Court Police (13 percent) had relatively low turnover rates, other police forces with relatively highly paid entry-level officers such as the U.S. Mint Police (41 percent), Bureau of Engraving and Printing Police (27 percent), and Secret Service Uniformed Division (25 percent) experienced significantly higher turnover rates. Additionally, turnover varied significantly among the 5 police forces with relatively lower paid entry-level officers. For example, while the Federal Protective Service (19 percent) and NIH Police (58 percent) entry-level officers both received the lowest starting pay, turnover differed dramatically. Likewise, no clear pattern existed regarding turnover among police forces receiving federal law enforcement retirement benefits and those receiving traditional federal retirement benefits. For example, entry-level officers at the Library of Congress Police, U.S. Capitol Police, and Supreme Court Police all received equivalent pay in fiscal year 2002. However, the Library of Congress (11 percent) had a lower turnover rate than the Capitol Police (13 percent) and Supreme Court Police (16 percent), despite the fact that officers at the latter 2 police forces received federal law enforcement retirement benefits. In addition, while officers at both the Park Police (19 percent) and Secret Service Uniformed Division (25 percent) received law enforcement retirement benefits, these forces experienced higher turnover rates than some forces such as U.S. Postal Service Police (14 percent) and FBI Police (17 percent), whose officers did not receive law enforcement retirement benefits and whose entry-level officers received lower starting salaries. More than half (316) of the 599 officers who voluntarily separated from the police forces in fiscal year 2002 went to TSA--nearly all (313 of 316) to become Federal Air Marshals where they were able to earn higher salaries, federal law enforcement retirement benefits, and a type of pay premium for unscheduled duty equaling 25 percent of their base salary. The number (316) of police officers who voluntarily separated from the 13 police forces to take positions at TSA nearly equaled the increase in the total number of separations (354) that occurred between fiscal year 2001 and 2002. About 25 percent (148) of the voluntarily separated officers accepted other federal law enforcement positions, excluding positions at TSA, and about 5 percent (32 officers) took nonlaw enforcement positions, excluding positions at TSA. Furthermore, about 9 percent (51) of the voluntarily separated officers took positions in state or local law enforcement or separated to, among other things, continue their education. Officials were unable to determine where the remaining 9 percent (52) of the voluntarily separated officers went. Figure 1 shows a percentage breakdown of where the 599 officers who voluntarily separated from the 13 police forces during fiscal year 2002 went. Although we did not survey individual officers to determine why they separated from these police forces, officials from the 13 forces reported a number of reasons that officers had separated, including to obtain better pay and/or benefits at other police forces, less overtime, and greater responsibility. Without surveying each of the 599 officers who voluntarily separated from their police forces in fiscal year 2002, we could not draw any definitive conclusions about the reasons they left. Data we gathered from the 13 police forces since we issued our report indicate that fiscal year 2003 turnover rates will drop significantly at 12 of 13 forces--even below historical levels at most of the forces--if patterns for the first 9 months of fiscal year 2003 continue for the remaining months. Prospective turnover rates at these 12 forces in fiscal year 2003 range from being 21 to 83 percent lower than fiscal year 2002 levels. In addition, prospective fiscal year 2003 turnover rates at 8 of the 13 forces are below historical levels. The use of human capital flexibilities to address turnover varied among the 13 police forces. For example, officials at 4 of the 13 police forces reported that they were able to offer retention allowances, which may assist the forces in retaining experienced officers, and 3 of these police forces used this tool to retain officers in fiscal year 2002. The average retention allowances paid to officers in fiscal year 2002 were about $1,000 at the Pentagon Force Protection Agency, $3,500 at the Federal Protective Service, and more than $4,200 at the NIH Police. The police forces reported various reasons for not making greater use of available human capital flexibilities in fiscal year 2002, including lack of funding for human capital flexibilities, lack of awareness among police force officials that the human capital flexibilities were available, and lack of specific requests for certain flexibilities such as time-off awards or tuition reimbursement. The limited use of human capital flexibilities by many of the 13 police forces and the reasons provided for the limited use are consistent with our governmentwide study of the use of such authorities. In December 2002, we reported that federal agencies have not made greater use of such flexibilities for reasons such as agencies' weak strategic human capital planning, inadequate funding for using these flexibilities given competing priorities, and managers' and supervisors' lack of awareness and knowledge of the flexibilities. We further stated that the insufficient or ineffective use of flexibilities can significantly hinder the ability of agencies to recruit, hire, retain, and manage their human capital. Additionally, in May 2003, we reported that OPM can better assist agencies in using human capital flexibilities by, among other things, maximizing its efforts to make the flexibilities more widely known to agencies through compiling, analyzing, and sharing information about when, where, and how the broad range of flexibilities are being used, and should be used, to help agencies meet their human capital management needs. Entry-level pay and retirement benefits varied widely across the 13 police forces. Annual pay for entry-level police officers ranged from $28,801 to $39,427, as of September 30, 2002. Officers at 4 of the 13 police forces received federal law enforcement retirement benefits, while officers at the remaining 9 police forces received standard federal employee retirement benefits. According to officials, all 13 police forces performed many of the same types of general duties, such as protecting people and property and screening people and materials entering and/or exiting buildings under their jurisdictions. The minimum qualification requirements and the selection processes were generally similar among most of the 13 police forces. At $39,427 per year, the U.S. Capitol Police, Library of Congress Police, and Supreme Court Police forces had the highest starting salaries for entry-level officers, while entry-level officers at the NIH Police and Federal Protective Service received the lowest starting salaries at $28,801 per year. The salaries for officers at the remaining 8 police forces ranged from $29,917 to $38,695. Entry-level officers at 5 of the 13 police forces received an increase in pay, ranging from $788 to $1,702, upon successful completion of basic training. Four of the 13 police forces received federal law enforcement retirement benefits and received among the highest starting salaries, ranging from $37,063 to $39,427. Figure 2 provides a comparison of entry-level officer pay and retirement benefits at the 13 police forces. Entry-level officers at 12 of the 13 police forces (all but the U.S. Postal Service Police) received increases in their starting salaries between October 1, 2002, and April 1, 2003. Entry-level officers at three of the four police forces (FBI Police, Federal Protective Service, and NIH Police) with the lowest entry-level salaries as of September 30, 2002, received raises of $5,584, $4,583, and $4,252, respectively, during the period ranging from October 1, 2002, through April 1, 2003. In addition, entry-level officers at both the U.S. Capitol Police and Library of Congress Police--two of the highest paid forces--also received salary increases of $3,739 during the same time period. These pay raises received by entry-level officers from October 1, 2002, through April 1, 2003, narrowed the entry-level pay gap for some of the 13 forces. For example, as of September 30, 2002, entry- level officers at the FBI Police received a salary $8,168 less than an entry- level officer at the U.S. Capitol Police. However, as of April 1, 2003, the pay gap between entry-level officers at the two forces had narrowed to $6,323. Officers at the 13 police forces reportedly performed many of the same types of duties, such as protecting people and property, patrolling the grounds on foot, and conducting entrance and exit screenings. Police force officials also reported that officers at all of the police forces had the authority to make arrests. Although there are similarities in the general duties, there were differences among the police forces with respect to the extent to which they performed specialized functions. We have observed in our recent Performance and Accountability Series that there is no more important management reform than for agencies to transform their cultures to respond to the transition that is taking place in the role of government in the 21st century. Establishing the new DHS is an enormous undertaking that will take time to achieve in an effective and efficient manner. DHS must effectively combine 22 agencies with an estimated 160,000 civilian employees specializing in various disciplines, including law enforcement, border security, biological research, computer security, and disaster mitigation, and also oversee a number of non- homeland security activities. To achieve success, the end result should not simply be a collection of components in a new department, but the transformation of the various programs and missions into a high performing, focused organization. Implementing large-scale change management initiatives, such as establishing a DHS, is not a simple endeavor and will require the concentrated efforts of both leadership and employees to accomplish new organizational goals. We have testified previously that at the center of any serious change management initiative are the people--people define the organization's culture, drive its performance, and embody its knowledge base. Experience shows that failure to adequately address--and often even consider--a wide variety of people and cultural issues is at the heart of unsuccessful mergers and transformations. Recognizing the "people" element in these initiatives and implementing strategies to help individuals maximize their full potential in the new organization, while simultaneously managing the risk of reduced productivity and effectiveness that often occurs as a result of the changes, is the key to a successful merger and transformation. Chairwoman Davis, today you are releasing a report that we prepared at your and Senator Voinovich's request that identifies the key practices and specific implementation steps with illustrative private and public sector examples that agencies can take as they transform their cultures to be more results-oriented, customer-focused, and collaborative in nature. DHS could use these practices and steps to successfully transform its culture and merge its various originating components into a unified department. (See table 3.) As Secretary Ridge and his leadership team will recognize, strategic human capital management is a critical management challenge for DHS. In our report on homeland security issued last December, we recommended that OPM, in conjunction with the Office of Management and Budget and the agencies, should develop and oversee the implementation of a long- term human capital strategy that can support the capacity building across government required to meet the objectives of the nation's efforts to strengthen homeland security. With respect to DHS, in particular, this strategy should establish an effective performance management system, which incorporates the practices that reinforce a "line of sight" that shows how unit and individual performance can contribute to overall organization goals; provide for the appropriate use of the human capital flexibilities granted to DHS to effectively manage its workforce; and foster an environment that promotes employee involvement and empowerment, as well as constructive and cooperative labor management employee relations. In response to these recommendations, the Director of OPM stated that OPM has created a design process that is specifically intended to make maximum use of the flexibilities that Congress has granted to DHS, including the development of a performance management system linking individual and organizational performance. Chairwoman Davis, at your and Senator Voinovich's request, we are reviewing the design process DHS and OPM have put in place and we expect to issue our first report this September. DHS must also consider differences in pay, benefits, and performance management systems of the employee groups that were brought into DHS. Last March, the Secretary of Homeland Security highlighted examples of such differences. For example, basic pay is higher for Secret Service Uniformed Division officers than for General Schedule police officers. TSA uses a pay banding system with higher pay ranges than the General Schedule system. The Secretary also cited differences in benefits. The Secret Service Uniformed Division officers and TSA Air Marshals are covered under the law enforcement officer retirement benefit provisions, while the Federal Protective Service police and law enforcement security officers and various Customs Service employees, among others, are not. Further, the Secretary stated that DHS and OPM employees will determine if the differences in pay and benefits constitute unwarranted disparities and if so, they will make specific recommendations on how these differences might be eliminated in DHS's human resources management system proposal, which will be submitted later this year. The performance management systems among DHS components also have significant differences that need to be considered. The performance management systems vary in fundamental ways. Of the 4 largest agencies joining DHS, the Customs Service's and TSA's performance management systems have 2-level performance rating systems. We have raised concerns that such approaches may not provide enough meaningful information and dispersion in ratings to recognize and reward top performers, help everyone attain their maximum potential, and deal with poor performers. The Coast Guard has a 3-level system and Immigration and Naturalization Service has a 5-level system. One of the key practices mentioned above to a successful merger and transformation is to use the performance management system to define the responsibility and assure accountability for change. An effective performance management system can be a strategic tool to drive internal change and achieve desired results. Effective performance management systems are not merely used for once- or twice-yearly individual expectation setting and rating processes, but are tools to help the organization manage on a day-to-day basis. These systems are used to achieve results, accelerate change, and facilitate two-way communication throughout the year so that discussions about individual and organizational performance are integrated and ongoing. The performance management system must link organizational goals to individual performance and create a line of sight between an individual's activities and organizational results. Chairwoman Davis, at your and Senator Voinovich's request, we identified a set of key practices that federal agencies could use to create this line of sight and develop effective performance management systems. These practices helped public sector organizations both in the United States and abroad create a line of sight between individual performance and organizational success and, thus, transform their cultures to be more results-oriented, customer-focused, and collaborative in nature. DHS has the opportunity to develop a modern, effective, and credible performance management system to manage and direct its transformation. DHS should consider these key practices as it develops a performance management system with the adequate safeguards, including reasonable transparency and appropriate accountability mechanisms in place, to help create a clear linkage between individual performance and organizational success. We recently reported that TSA, one of the components that joined DHS, has taken the first steps in creating such a linkage and establishing a performance management system that aligns individual performance expectations with organizational goals. TSA has implemented standardized performance agreements for groups of employees, including transportation security screeners, supervisory transportation security screeners, supervisors, and executives. These performance agreements include both organizational and individual goals and standards for satisfactory performance that can help TSA show how individual performance contributes to organizational goals. For example, each executive performance agreement includes organizational goals, such as to maintain the nation's air security and ensure an emphasis on customer satisfaction, as well as individual goals, such as to demonstrate through actions, words, and leadership, a commitment to civil rights. To strengthen its current executive performance agreement and foster the culture of a high-performing organization, we recommended that TSA add performance expectations that establish explicit targets directly linked to organizational goals, foster the necessary collaboration within and across organizational boundaries to achieve results, and demonstrate commitment to lead and facilitate change. TSA agreed with this recommendation. Madam Chairwoman and Mr. Chairman, this completes my prepared statement. I would be happy to respond to any questions you or other members of the Subcommittee may have at this time. For further information, please call me or Weldon McPhail at (202) 512-8777. Other key contributors to this testimony were Carole Cimitile, Katherine Davis, Geoffrey Hamilton, Janice Lichty, Michael O'Donnell, Lisa Shames, Lou Smith, Maria Strudwick, Mark Tremba, and Gregory H. Wilmoth. Federal Uniformed Police: Selected Data on Pay, Recruitment, and Retention at 13 Police Forces in the Washington, D.C., Metropolitan Area (GAO-03-658, June 13, 2003). Review of Potential Merger of the Library of Congress Police and/or the Government Printing Office Police with the U.S. Capitol Police (GAO-02-792R, July 5, 2002). Federal Retirement: Benefits for Members of Congress, Congressional Staff, and Other Employees (GAO/GGD-95-78, May 15, 1995). Capitol Police: Administrative Improvements and Possible Merger With the Library of Congress Police (GAO/AFMD-91-28, Feb. 28, 1991). Recruitment and Retention: Inadequate Federal Pay Cited as Primary Problem by Agency Officials (GAO/GGD-90-117, Sept. 11, 1990). Report of National Advisory Commission on Law Enforcement (OCG-90-2, Apr. 25, 1990). Federal Pay: U.S. Park Police Compensation Compared With That of Other Police Units (GAO/GGD-89-92, Sept. 25, 1989). Compensation And Staffing Levels Of the FAA Police At Washington National And Washington Dulles International Airports (GAO/GGD-85-24, May 17, 1985). Results-Cultures: Implementation Steps to Assist Mergers and Organizational Transformations (GAO-03-669, July 2, 2003). Human Capital: Opportunities to Improve Executive Agencies' Hiring Processes (GAO-03-450, May 30, 2003). Human Capital: OPM Can Better Assist Agencies in Using Personnel Flexibilities (GAO-03-428, May 9, 2003). Human Capital: Selected Agency Actions to Integrate Human Capital Approaches to Attain Mission Results (GAO-03-446, Apr. 11, 2003). Results-Oriented Cultures: Creating a Clear Linkage between Individual Performance and Organizational Success (GAO-03-488, Mar. 14, 2003). Human Capital: Effective Use of Flexibilities Can Assist Agencies in Managing Their Workforces (GAO-03-2, Dec. 6, 2002). Highlights of a GAO Forum: Mergers and Transformation: Lessons Learned for a Department of Homeland security and Other Federal Agencies (GAO-03-293SP, Nov. 14, 2002). Highlights of a GAO Roundtable: The Chief Operating Officer Concept: A Potential Strategy To Address Federal Governance Challenges (GAO-03-192SP, Oct. 4, 2002). Results-Oriented Cultures: Using Balanced Expectations to Manage Senior Executive Performance (GAO-02-966, Sept. 27, 2002). Results-Oriented Cultures: Insights for U.S. Agencies from Other Countries' Performance Management Initiatives (GAO-02-862, Aug. 2, 2002). A Model of Strategic Human Capital Management (GAO-02-373SP, Mar. 15, 2002). Human Capital: Practices That Empowered and Involved Employees (GAO-01-1070, Sept. 14, 2001). FBI Reorganization: Progress Made in Efforts to Transform, but Major Challenges Continue (GAO-03-759T, June 18, 2003). Homeland Security: Information Sharing Responsibilities, Challenges, and Key Management Issues (GAO-03-715T, May 8, 2003). High-Risk Series: Strategic Human Capital Management (GAO-03-120, Jan. 1, 2003). Major Management Challenges and Program Risks: Department of Justice (GAO-03-105, Jan. 2003). Homeland Security: Management Challenges Facing Federal Leadership (GAO-03-260, Dec. 20, 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.

Many federal agencies in the Washington, D.C., metropolitan area have their own police forces to ensure the security and safety of the persons and property within and surrounding federal buildings. In the executive branch, for example, the Secret Service has over 1,000 uniformed officers protecting the White House, the Treasury Building, and other facilities used by the Executive Office of the President. The Interior Department's Park Police consists of more than 400 officers protecting parks and monuments in the area. The Pentagon Force Protection Agency has recently increased its force to over 400 officers. Even the Health and Human Services Department maintains a small police force on the campus of the National Institutes of Health (NIH) in Bethesda, Maryland. In addition, there are federal uniformed police forces in both the Legislative and Judicial Branches of the federal government. We have continued to examine the transformation of 22 agencies with an estimated 160,000 civilian employees into the Department of Homeland Security. After the terrorist attacks of September 11, 2001, and the government's subsequent efforts to increase airline security, many of these local police forces began experiencing difficulties in recruiting and retaining officers. Police force officials raised concerns that the newly created Transportation Security Administration (TSA) and its Federal Air Marshal Program were luring many prospective and experienced officers by offering better starting pay and law enforcement retirement benefits. Former Congresswoman Morella asked us to look into these concerns. Most forces reported experiencing recruitment difficulties. Officials at 8 of the 13 forces told us they experienced moderate to very great recruiting difficulties. Despite this, none of the 13 forces used available human capital flexibilities, such as recruitment bonuses or student loan repayments in fiscal year 2002, to try to improve their recuiting efforts. In fiscal year 2002, many of the local forces experienced sizable increases in turnover, mostly due to voluntary separations. About half of the officers who left voluntarily went to the TSA. Some of the forces provided retention allowances and incentive awards to try to retain more of their officers. Entry-level pay at the 13 agencies during fiscal year 2002 ranged from $28,801 to $39,427, a gap that narrowed for some of the forces in fiscal year 2003 because officers at 12 of the 13 agencies received increased entry-level pay. However, information we have gathered since we issued our report indicates that turnover in most of the police forces has dropped significantly during fiscal year 2003. The increase in turnover that occurred at 12 of the 13 police forces during fiscal year 2002 appears to be associated with the concurrent staffing of the TSA Federal Air Marshal Program. TSA's hiring of air marshals during fiscal year 2003 has been pared back.

VA manages its intramural research program through ORD. According to ORD's 2009 to 2014 strategic plan, ORD has 10 research priority areas, which are topics of research that are considered important to VA. The research priority areas are the health care needs of veterans who have served in Operation Enduring Freedom and Operation Iraqi Freedom, aging-related conditions, mental health care and well-being, chronic diseases, long-term care and caregiving, deployment-related exposure to hazardous environmental agents, equity in care, access in rural areas, women's health, and personalized medicine. According to VA officials, all of these research priority areas could include PTSD research. VA funds intramural research through the following: VA's Merit Review Program: This program supports research studies typically conducted by one VA investigator at one VA facility and is administered by ORD's four research and development services, each of which has a different research focus. (See table 1.) Each research and development service is responsible for soliciting, reviewing, selecting, and funding research proposals submitted to the service. VA's CSP: This program, which is administered by Clinical Science, funds larger-scale, multisite clinical trials and epidemiological research studies on key diseases that impact veterans. The Merit Review Program has research award funding limits, which are set by VA. In some cases, intramural research awards may only be funded for a certain number of years. See table 2 for more information. In addition to individual studies conducted at VA facilities, VA has several research centers and programs that conduct or support PTSD research. For example, the National Center for PTSD focuses on PTSD research. VA also has Research Enhancement Award Programs, which help support PTSD research by providing staff and other resources to investigators. (For more information on VA research centers and research programs that conduct or support PTSD research, see app. I.) According to a VA official from the National Center for PTSD, VA does not fund most of the PTSD research that is being conducted today. Intramural research proposals may be service-directed--solicited by ORD on specific topics--or investigator-initiated-- submitted by investigators to ORD on their own initiative. Investigators submit proposals either in response to a request for proposals on a specific topic (for service- directed proposals) or to an open request for proposals (for investigator- initiated proposals). For both the Merit Review Program and CSP, proposals are typically evaluated in two review cycles per year. To be considered for intramural research funding: The proposal must be veteran-centric. The proposal must have received approval from the director of the medical center and the research and development office of the medical center where the lead investigator, known as a principal investigator, is based. The principal investigator and any coprincipal investigators must demonstrate a primary professional commitment to VA, as demonstrated by at least a 5/8 time VA appointment at the time the funding is awarded and previous VA experience, including experience in research and patient care. Research must be conducted primarily on VA premises. The principal investigator and any coprincipal investigators must have designated research space within a VA medical center. Overall intramural PTSD research funding from VA's medical and prosthetic research appropriation increased from $9.9 million in fiscal year 2005 to $24.5 million in fiscal year 2009. The number of intramural PTSD research studies funded through the Merit Review Program and CSP increased from 47 in fiscal year 2005 to 96 in fiscal year 2009. Based on the VA data we obtained and summarized, we found that overall intramural PTSD research funding from VA's medical and prosthetic research appropriation increased from about $9.9 million in fiscal year 2005 to about $24.5 million in fiscal year 2009, or by about 150 percent (see fig. 1). Overall intramural PTSD research funding included funding for specific PTSD studies as well as for other PTSD research-related funding, such as career development awards provided to junior VA investigators to conduct PTSD studies, salaries for VA investigators who are not VA clinicians, funding for PTSD research conducted within ORD research centers, and PTSD research meetings. Of the $80.2 million provided for PTSD studies from fiscal year 2005 through fiscal year 2009, $51.3 million, or about 64 percent, was for studies funded through the Merit Review Program. The remaining approximately $28.9 million, or about 36 percent, was for CSP studies. (See fig. 2.) From fiscal year 2005 through fiscal year 2009, intramural PTSD research funding ranged from 2.5 percent to 4.8 percent of VA's medical and prosthetic research appropriation. (See table 3 for VA intramural PTSD research funding and VA's medical and prosthetic research appropriations from fiscal year 2005 through fiscal year 2009.) For comparison, according to a 2009 report prepared by ORD staff for VA's National Research Advisory Council, for fiscal year 2009, funding for intramural traumatic brain injury research was about $14.6 million, 2.9 percent of the medical and prosthetic research appropriation. Funding for spinal cord injury research was $27.2 million, 5.3 percent of the medical and prosthetic research appropriation. Funding for intramural cardiovascular disease and stroke research was $53.1 million, 10.4 percent of the medical and prosthetic research appropriation. Similarly, we found that the number of PTSD studies funded from VA's medical and prosthetic research appropriations through VA's intramural research program increased from fiscal year 2005 through fiscal year 2009. (See fig. 3.) Specifically, in fiscal year 2005, 47 intramural PTSD research studies were funded while in fiscal year 2009, 96 intramural PTSD research studies were funded. This represented an increase of more than 100 percent. Of all the studies funded each fiscal year, only a small number were CSP studies. According to VA officials, intramural research proposals, including those on PTSD, are reviewed and funded in VA's Merit Review Program and VA's CSP primarily according to scientific merit. VA's Merit Review Program Intramural research proposals submitted to VA's Merit Review Program are reviewed through a series of steps prior to funding. See figure 4 for an overview of the submission, review, and funding process for proposals submitted to the Merit Review Program. (For more detailed information on this process, see app. II.) First, investigators submit proposals electronically. Investigators typically submit Merit Review Program proposals to grants.gov, the government's central grant identification and proposal portal, in response to a request for proposals. Submitted proposals are then transferred to eRA Commons, an electronic system for grant administration functions, for VA processing and review. Second, each proposal is assigned to a merit review panel for evaluation. Each merit review panel reviews proposals in a specific research topic area, and is composed of panelists, typically associate-level professors, who are selected based on their expertise in this area. According to VA documents, as of 2010, there were a total of 35 merit review panels across VA's research and development services. The merit review panels evaluate each proposal based on its scientific merit. Panelists consider several criteria in evaluating the overall scientific merit of a proposal. (See table 4 for criteria used to determine scientific merit.) Third, the merit review panelists score the proposals to determine their rank. Each panelist provides a score to each of the proposals reviewed by the panel. The scores are averaged to create a "priority score" for the proposal. (See app. II for specific scoring guidelines given to panelists in all research and development services.) All proposals scored by the merit review panel are then ranked by priority score among all of the proposal scores recently assigned by the merit review panel. The rank of the proposal is used to determine the "percentile" of the proposal. Finally, research and development service directors determine how many proposals to fund. All of the proposals scored by all merit review panels in a research and development service in the review cycle are ranked together by their percentiles to be considered for funding. According to VA officials, research and development service directors typically fund up to the 25th percentile of proposals in a review cycle, beginning with those with the most scientific merit, although the number of proposals funded may vary depending on the budget. According to VA, research and development service directors may also choose to fund a small number of additional proposals at the margin that respond to research priority areas. For example, if the fundable range determined by a research and development service director was up to the 25th percentile, proposals at the 26th percentile related to research priority areas could also be considered for funding. VA's Cooperative Studies Program VA intramural research proposals submitted to CSP are reviewed and scored in a process similar to that of the Merit Review Program prior to consideration for funding. To help develop the CSP proposal, investigators are assisted by members of a CSP center, a VA entity that provides guidance and support for research across multiple sites. (See fig. 5 for an overview of the process for submitting, reviewing, and funding a CSP proposal. For more information on ORD's CSP review process, see app. III.) Before submitting a research proposal, investigators submit a letter of intent, or a preliminary outline of a proposal, to the Director of Clinical Science to be approved for planning a CSP proposal. Based on the merit of the letter of intent, as determined by three or more reviewers, the Clinical Science Director decides whether to fund planning efforts to develop a CSP proposal. When the principal investigator receives approval to begin planning efforts, the Clinical Science Director assigns a CSP center to provide statistical and methodological guidance to the investigator. The director of the CSP center designates a project manager and methodologist, such as a person with expertise in biostatistics, to provide guidance to the principal investigator. The Clinical Science Director, with recommendations from the principal investigator, then forms a planning committee of additional experts to assist in developing a CSP proposal. The planning committee develops a CSP proposal over the course of two planning meetings. Once a proposal is developed, the CSP center, on behalf of the principal investigator, submits a hard copy proposal to the CSP central office for evaluation by the Cooperative Studies Scientific Merit Review Board. This board consists of reviewers who have extensive experience in clinical research and the conduct of clinical trials or epidemiology studies. Reviewers evaluate CSP proposals based on scientific merit. According to VA, the scientific merit of a CSP proposal is defined by the importance of the proposal, its feasibility, the clarity and achievability of its objectives, the adequacy of the plan of investigation, the correctness of the technical details, and the adequacy of the safeguards for the welfare of the patients. Based on these criteria, reviewers discuss the general scientific merit of the proposal. Reviewers vote on whether to unconditionally approve, conditionally approve, reject or defer with recommendation for resubmittal, or reject each proposal. (See table 5 for an overview of funding recommendations provided by the board.) After the reviewers vote, they each provide scores for a proposal recommended for funding based on scientific merit. The scores are then averaged to provide a priority score for a proposal. Finally, the Clinical Science Director considers the priority scores of all the proposals in that review cycle and selects the proposals with the strongest priority scores for funding. According to VA officials, the number of proposals funded may vary depending on the budget. The VA/DOD Evidence-Based Practice Work Group, which is responsible for developing and updating all of VA's CPGs, has a standardized and reproducible process to review all relevant research outcomes when developing or updating all CPGs, including the PTSD CPG. To develop or update a CPG, the VA/DOD Evidence-Based Practice Work Group identifies and assigns a group of VA and DOD clinical leaders and experts who are knowledgeable in the subject area to work on the CPG. Generally, the process to develop or update a CPG consists of the following steps. First, the assigned group of VA and DOD clinical leaders and experts identifies "clinical questions" that will be answered in the CPG. According to VA officials, clinical questions can be either broad or specific. For example, the 2004 PTSD CPG contained clinical questions regarding whether early intervention is more effective than later intervention, and whether certain interventions, such as different psychotherapies, are more effective than others. Second, in order to minimize bias, an external contractor conducts a systematic review of relevant research and selects and summarizes the most methodologically rigorous research studies that are applicable to each of the clinical questions. Third, after receiving summaries of the studies with the highest level of evidence, the VA and DOD group of clinical leaders and experts rates the research using an established grading scheme that considers the level of evidence of each research study--the scope and methodological rigor of an individual study; the overall quality of evidence--the overall quality of all of the research that addresses a particular clinical question, considering the level of evidence of all the studies considered; and the net effect of an intervention--according to the collective results of the studies considered, the intervention's benefits minus the intervention's harms. Finally, the assigned group of VA and DOD clinical leaders and experts assigns a grade to each evidence-based recommendation based on an assessment of the overall quality of evidence and the net effect of the intervention. (See app. IV for a detailed description of the process used to develop evidence-based VA/DOD CPGs.) The process for conducting a systematic review of research outcomes to develop or update a CPG is repeated as often as is deemed necessary by the VA/DOD Evidence-Based Practice Work Group according to its written procedures and designated time frames. According to VA/DOD Evidence- Based Practice Work Group documents, routine updates to the CPGs should ideally occur approximately every 2 years. However, updates to CPGs often do not occur every 2 years, and VA officials told us that some CPGs are updated more frequently than others based on availability of resources and priority areas. Additionally, VA officials reported that a CPG will be immediately updated if any evidence-based recommendation contained in it is identified as harmful to patients. According to VA, the VA/DOD Evidence-Based Practice Work Group approved an update to the 2004 PTSD CPG on October 25, 2010, and published the update on VA's Web site on November 17, 2010. According to VA officials, the systematic process outlined above was used to review all relevant research outcomes and make evidence-based recommendations for PTSD services to both develop and update the PTSD CPG. According to VA officials, the decision to require that cognitive processing therapy and prolonged exposure therapy be made available to veterans diagnosed with PTSD at VA facilities--as indicated in the Handbook, which established certain requirements for mental health services within VA--was based on a review of research outcomes and the availability of existing resources. Review of research outcomes. According to VA, agency officials and qualified subject matter experts reviewed relevant research outcomes and the quality of the research to determine the most efficacious PTSD treatments available when determining which PTSD services to include in the Handbook and make available to veterans. Specifically, VA officials told us that their decision to include cognitive processing therapy and prolonged exposure therapy in the Handbook was influenced by the fact that both of these had been graded as level "A" treatments in the 2004 PTSD CPG (indicating that the intervention is always indicated and acceptable). Furthermore, VA officials said that these two therapies had greater evidence supporting their effectiveness than other PTSD services also graded as level "A" in the 2004 PTSD CPG. In addition, VA officials added that their decision was validated by the results of a VA- commissioned Institute of Medicine study published in 2008 that reviewed the evidence for existing PTSD treatments. According to VA, the study found that cognitive processing therapy and prolonged exposure therapy were considered efficacious treatments for PTSD. While the Institute of Medicine report was released after VA had already decided to include cognitive processing therapy and prolonged exposure therapy in the Handbook, VA officials explained that the Institute of Medicine report was the basis for the decision not to include other PTSD services in the Handbook. Availability of existing resources. VA officials told us that prior to issuing the Handbook in 2008, VA had already begun investing considerable resources to implement national training programs for cognitive processing therapy and prolonged exposure therapy in 2006 and 2007, respectively. VA officials said that they decided to implement the national training programs because VA realized the need to create sufficient capacity so that evidence-based PTSD treatments could be available to veterans throughout the VA system. VA explained that the national training programs were rolled out in advance of the Handbook's issuance as part of the implementation of VA's Comprehensive Veterans Health Administration Strategic Plan for Mental Health Services, which called for rapid implementation of evidence-based treatments. VA did this to ensure that it had the capacity to provide cognitive processing therapy and prolonged exposure therapy to all veterans with PTSD for whom these treatments were clinically appropriate. VA officials said that they were able to begin implementing national training programs for cognitive processing therapy in 2006 and prolonged exposure therapy in 2007 because VA had qualified instructors to administer the programs and money available to fund them. Unlike the written and standardized process that the VA/DOD Evidence- Based Practice Work Group established to develop CPGs, VA does not have a formal written process or framework to explain its decision for including cognitive processing therapy and prolonged exposure therapy in the Handbook. VA officials explained that they followed a process when choosing cognitive processing therapy and prolonged exposure therapy, but added that clinical decision-making processes are not typically expected to be documented in a formal manner. VA officials told us that they plan to assess the implementation of the Handbook and will update PTSD requirements in it as needed or as new information or unexpected obstacles arise in the future. VA officials stated that they are currently clarifying the language regarding some of the requirements, but do not plan to revise any of the requirements relating to PTSD services at this time. We provided a draft of this report to VA and received technical comments, which we incorporated into our report as appropriate. We are sending a copy of this report to the Secretary of Veterans Affairs. The report also is available at no charge on the GAO Web site at http://www.gao.gov. If you or your staff have any questions about this report, please contact me at (202) 512-7114 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 members who made key contributions to this report are listed in appendix V. In addition to post-traumatic stress disorder (PTSD) research studies that are conducted by individual Department of Veterans Affairs (VA) investigators, or researchers, VA also funds a number of research centers or programs that conduct or support PTSD research. See table 6 for a description of these VA research centers and programs. Research proposals submitted to the Department of Veterans Affairs' (VA) Merit Review Program are evaluated in merit review panels that each review proposals in a specific research topic area. Each merit review panel is comprised of panelists, typically associate-level professors, who are selected based on their expertise in the area. Panelists are responsible for scoring proposals based on scientific merit to provide funding recommendations. See figure 6 for a detailed description of the Merit Review Program's process for reviewing research proposals and table 7 for the Merit Review Program's scoring guidelines. Research proposals submitted to the Department of Veterans Affairs' (VA) Cooperative Studies Program (CSP) are reviewed and scored by the Cooperative Studies Scientific Merit Review Board. Reviewers on the board are chosen based on their expertise in clinical or epidemiological research. They typically serve 4-year terms, and ad hoc members can be added depending on specific expertise that may be needed to review a proposal. According to VA, as of October 2010, there were six reviewers on the board. During the research proposal review process, the study team--which includes the lead researcher (referred to as the principal investigator) and a methodologist, such as a person with expertise in biostatistics--has an interactive discussion with the board regarding the proposal. Reviewers evaluate CSP proposals based on scientific merit and provide scores to reflect their funding recommendations. See figure 7 for a detailed description of the review process for CSP research proposals. In 1999, the Department of Veterans Affairs (VA) and the Department of Defense (DOD) formed the VA/DOD Evidence-Based Practice Work Group to issue joint VA/DOD clinical practice guidelines (CPG)--tools that provide guidance and evidence-based recommendations to clinicians regarding the most effective interventions and services for a variety of health care topics. To develop or update a CPG, the VA/DOD Evidence- Based Practice Work Group has a standardized process to ensure that systematic reviews of relevant research outcomes are conducted in order to formulate evidence-based recommendations for prevention, assessment, and treatment services. To develop or update a CPG, the VA/DOD Evidence-Based Practice Work Group identifies two clinical leaders--one from VA and one from DOD-- who then help identify not more than 15 to 20 other experts in the subject area to form a "guideline working group." A member of the VA/DOD Evidence-Based Practice Work Group is also selected to be an evidence chaperone for each CPG to ensure that conformity to prevailing standards for conducting high-quality systematic reviews is upheld. To determine the scope of the CPG, the guideline working group, the evidence chaperone, and a facilitator are responsible for identifying clinical questions that are to be answered by a systematic review of relevant research outcomes. According to VA officials, clinical questions can be both broad and specific. For example, the 2004 post-traumatic stress disorder CPG contained clinical questions regarding whether early intervention is more effective than later intervention and whether certain interventions, such as different psychotherapies, are more effective than others. According to VA, in order to answer these clinical questions, an external evidence center--an entity that conducts systematic reviews of research on a variety of topics--is contracted to collect and review all relevant research (including, but not limited to, VA- and DOD-sponsored research) to assess its applicability to each clinical question under consideration using explicit and reproducible methods. The evidence center then focuses its review on the best available research, that is, high-quality, methodologically rigorous studies that address health issues that impact VA and DOD populations and consider the effectiveness as well as the harms and benefits of the intervention at issue. According to VA officials, the evidence center provides summaries of only the best available research to the guideline working group for review. After receiving the summaries, the guideline working group reviews the research in sequential steps using an established rating scheme developed by the U.S. Preventive Services Task Force to formulate evidence-based recommendations. See figure 8 for an overview of the steps that the guideline working group uses to formulate evidence-based recommendations. Level of evidence. First, the guideline working group reviews the summaries to identify the level of evidence, or the level of methodological rigor. For example, research studies that have the highest quality are categorized as "I" (indicating at least one properly done randomized controlled trial), while research studies of the lowest quality are categorized as "III" (indicating that the research reflects the opinion of respected authorities, descriptive studies, case reports, and expert committees). (See table 8.) Overall quality of research. After determining the level of evidence of individual research studies, the guideline working group makes a determination regarding the overall quality of all of the research that addresses a particular clinical question. The overall quality takes into account the number, quality, and size of all of the individual research studies together as well as the consistency of the results between research outcomes to determine the collective overall strength of the research. Based on this review, the guideline working group determines the overall quality of the evidence to be good, fair, or poor. (See table 9.) Net effect of the intervention. For interventions that were supported by studies of "fair" or "good" overall quality, the guideline working group evaluates the benefits and the potential harms to determine the net effect of the intervention. The net effect of an intervention takes into account the benefits of the intervention minus the harms to determine the overall potential clinical benefit that the intervention may provide to patients. The net effect of the intervention ranges from "substantial" (meaning the benefit substantially outweighs the harm) to "zero or negative" (meaning it has no impact or a negative impact on patients). (See table 10.) Grade of evidence-based recommendation. In the final step, the guideline working group uses its assessment of the overall quality of the evidence and the net effect of the intervention to grade evidence-based recommendations. (See table 11.) In addition to the contact named above, Mary Ann Curran, Assistant Director; Susannah Bloch; Stella Chiang; Martha R. W. Kelly; Melanie Krause; Lisa Motley; Michelle Paluga; Rebecca Rust; and Suzanne Worth made key contributions to this report. VA Health Care: Progress and Challenges in Conducting the National Vietnam Veterans Longitudinal Study. GAO-10-658T. Washington, D.C.: May 5, 2010. VA Health Care: Status of VA's Approach in Conducting the National Vietnam Veterans Longitudinal Study. GAO-10-578R. Washington, D.C.: May 5, 2010. VA Health Care: Preliminary Findings on VA's Provision of Health Care Services to Women Veterans. GAO-09-899T. Washington, D.C.: July 16, 2009. DOD and VA Health Care: Challenges Encountered by Injured Servicemembers during Their Recovery Process. GAO-07-589T. Washington, D.C.: March 5, 2007. VA Health Care: Spending for Mental Health Strategic Plan Initiatives Was Substantially Less Than Planned. GAO-07-66. Washington, D.C.: November 21, 2006. VA Health Care: Preliminary Information on Resources Allocated for Mental Health Strategic Plan Initiatives. GAO-06-1119T. Washington, D.C.: September 28, 2006. VA Health Care: VA Should Expedite the Implementation of Recommendations Needed to Improve Post-Traumatic Stress Disorder Services. GAO-05-287. Washington, D.C.: February 14, 2005. VA and Defense Health Care: More Information Needed to Determine If VA Can Meet an Increase in Demand for Post-Traumatic Stress Disorder Services. GAO-04-1069. Washington, D.C.: September 20, 2004.

In addition to providing health care to veterans, the Department of Veterans Affairs (VA) funds research that focuses on health conditions veterans may experience. According to VA, experts estimate that up to 20 percent of Operation Enduring Freedom and Operation Iraqi Freedom veterans have experienced post-traumatic stress disorder (PTSD) and demand for PTSD treatment is increasing. Because of the importance of research in improving the services that veterans receive, GAO was asked to report on VA's funding of PTSD research, and its processes for funding PTSD research proposals, reviewing and incorporating research outcomes into clinical practice guidelines (CPG)--tools that offer clinicians recommendations for clinical services but do not require clinicians to provide one service over another--and determining which PTSD services are required to be made available at VA facilities. To do this work, GAO obtained and summarized VA data on the funding of PTSD research from its medical and prosthetic research appropriation through its intramural research program. GAO also reviewed relevant VA documents, such as those for developing CPGs and those related to VA's 2008 Uniform Mental Health Services in VA Medical Centers and Clinics handbook (Handbook), which defines certain mental health services that must be made available at VA facilities. GAO also interviewed VA officials. Based on VA data GAO obtained and summarized, GAO found that the amount of funding VA provided for intramural PTSD research increased from $9.9 million in fiscal year 2005 to $24.5 million in fiscal year 2009. From fiscal year 2005 through fiscal year 2009, intramural PTSD research funding ranged from 2.5 percent to 4.8 percent of VA's medical and prosthetic research appropriation. In addition, the number of PTSD research studies VA funded through the Merit Review Program and the Cooperative Studies Program (CSP)--VA's two primary funding mechanisms in its intramural research program--increased from 47 in fiscal year 2005 to 96 in fiscal year 2009. According to VA officials, intramural research proposals, including those on PTSD, are funded primarily according to scientific merit in both the Merit Review Program and CSP. Proposals are evaluated by a panel of reviewers and scored based on their scientific merit. Directors of VA's research and development services--offices that focus on different research areas and administer VA's intramural research program--fund proposals based on their scores, typically up to a specified percentile. The number of proposals funded may vary based on budgetary considerations and, for a small number of proposals, responsiveness to VA research priority areas. VA has a process to review and incorporate relevant research outcomes to develop CPGs for a number of topics, including PTSD. VA relies on the policies of a joint VA and Department of Defense (DOD) work group--comprised of VA and DOD officials--to ensure that systematic reviews of relevant research outcomes are conducted when issuing CPGs. In brief, a systematic review is conducted to identify the most methodologically rigorous research studies that are applicable to each clinical question contained in the CPG. A group of subject matter experts then assesses the individual research studies in order to determine the overall quality of evidence available for each particular clinical question, considers the potential benefits and harms of a clinical intervention to determine its net effect, and, based on an assessment of the overall quality of the evidence and the net effect of an intervention, develops recommendations for the CPG. According to VA officials, the decision to require that two PTSD services--cognitive processing therapy and prolonged exposure therapy--be made available at VA facilities by including them in the Handbook was based on a review of research outcomes and the availability of existing resources. Specifically, VA officials told GAO that these two services were strongly recommended in the 2004 PTSD CPG and had greater evidence supporting their effectiveness than other PTSD services. VA also told GAO that prior to the Handbook's 2008 issuance, VA had already begun investing resources in training programs for cognitive processing therapy in 2006 and prolonged exposure therapy in 2007. While VA provided some documentation regarding the decision-making process for PTSD services, VA officials explained that clinical decision-making processes are not typically expected to be documented in a formal manner. VA officials told GAO that they are currently clarifying language in the Handbook but do not plan to revise any requirements relating to PTSD services at this time. VA provided technical comments that GAO incorporated as appropriate.

Mr. Chairman, Representative Shadegg, and Members of the Subcommittee: We are pleased to be here today to discuss with the Subcommittee the results of work done on the burden that business and individual taxpayers face in complying with federal tax requirements. Because of concerns about business taxpayer burden, we identified sources of compliance burden and examined the feasibility of obtaining reliable dollar estimates of the compliance costs borne by business taxpayers. We have defined burden as the time taxpayers spend, monetary costs they incur, and frustrations they experience in complying with tax requirements. Because individual taxpayers may also face compliance burdens, we are currently reviewing alternative tax filing procedures to identify possible benefits to taxpayers and challenges presented by such alternatives. Although that work is incomplete, we can share some information about individual tax burden issues. To provide a perspective on business taxpayer burden, we collected information on compliance burden from the management and tax staffs of selected businesses, tax accountants, tax lawyers, representatives of tax associations, and officials of the Internal Revenue Service (IRS). The corporate businesses we met with varied by geographical location, size, and industry type. There are several points we will discuss today. First, according to the businesses we interviewed, the complexity of the Internal Revenue Code, compounded by the frequent changes made to the code, is the driving force behind business tax compliance burden. Second, a reliable estimate of the overall costs of tax compliance would be costly and in itself burdensome on businesses to obtain. Finally, reducing the compliance burden on businesses and individual taxpayers will be a difficult undertaking because of the various policy trade-offs, such as revenue and taxpayer equity, that must be made. While discussing with us the many issues associated with compliance burden, the business officials and tax experts also acknowledged the legitimate purposes and requirements of the tax system. They said that filing tax returns and paying taxes were all part of doing business. But most firmly believed there must be easier ways to achieve the goals of the federal tax system. Business officials and tax experts told us that, overall, the federal tax code is complex, difficult to understand, and in some cases indecipherable. They also said it was burdensome to comply with the code because of the additional record-keeping and calculations that the code requires. More specifically, they said businesses have difficulty with the code because of numerous and unwieldy cross-references and overly broad, imprecise, and ambiguous language. Such language, they said, appears to be designed to cover every conceivable case but leads to much taxpayer confusion and frequent misinterpretation of the code. Frequent legislative changes, including the effects of these changes on other sections of the code, were also cited as problematic. Respondents said that the frequent and large number of legislative changes make it difficult for businesses to keep current on provisions that apply to their specific situations. For example, 1 year after the expansive Tax Reform Act of 1986, the Omnibus Budget Reconciliation Act of 1987 changed about 50 provisions that potentially affected business tax compliance. Business officials and tax experts said it was their perception that these frequent changes were designed to fix loopholes or perceived abuses; yet, in making these changes, Congress appeared not to have considered the impact they have on other sections of the code. These same parties expressed frustration about provisions with finite lives being left to expire but later reauthorized. These are tax provisions that may contain sunset clauses to encourage future reevaluation. And while recognizing the value of these provisions, business officials and tax experts said informed business decisions are difficult to make without knowing a provision's fate. Each of these concerns about changes to the tax code added to the uncertainty businesses face in attempting to understand and comply with the tax code. The tax code also can create the need to establish and maintain numerous and sometimes duplicate sets of financial records. For example, all of the 17 businesses we spoke with said depreciation requirements caused them to maintain detailed records solely for tax purposes. For a given set of assets, some companies need to produce one set of computations and records for the regular federal tax and two additional sets for the federal Alternative Minimum Tax (AMT). Many businesses are also required to produce additional depreciation computations and records for state and local income and property tax purposes. Complexities in the code can also result in the need to complete time-consuming calculations. Among these, respondents frequently mentioned the calculations associated with the uniform capitalization rules, the AMT, and other provisions that force taxpayers to trace the many categories of interest expense and apply a separate tax treatment to each category. Our respondents also indicated that the compliance burden imposed by the federal tax system was made greater by the interplay of state and local tax requirements that at times were inconsistent with each other as well as with the federal code. Among the problems cited by businesses were different definitions of wages, income, and certain deductions; different methods for calculating depreciation; and inconsistent requirements for payroll reporting and timing of deposits. While the focus of our discussions was on the federal tax burden, some of the business respondents said that the compliance burden associated with state and local tax requirements exceeded the burden of the federal system. Some business officials and tax experts also cited IRS' administration of the federal tax code as contributing to business compliance burden, although to a lesser extent than the complexity of and frequent changes to the code. Of those who cited difficulties with IRS, problems identified were with the tax knowledge of IRS auditors, the clarity of IRS' correspondence and notices, and the amount of time IRS takes to issue regulations. The complexity of the code has a direct impact on IRS' ability to administer the code. The volume and complexity of information in the code make it difficult for IRS to ensure that its tax auditors are knowledgeable about the tax code and that their knowledge is current. Some business officials and tax experts said that IRS auditors lack sufficient knowledge about federal tax requirements, and in their opinion this deficiency has caused IRS audits to take more time than they otherwise might. However, other respondents said that IRS auditors were reasonable to work with. IRS recognizes the difficulty of maintaining a workforce of auditors who fully understand all tax requirements. IRS is developing a program to encourage auditors to become industry specialists so that they can increase their understanding of industry environments, accounting practices, and tax issues. experts said that the complexity of the forms and publications and the lack of clarity of correspondence and notices resulted in frustrating and burdensome experiences for the taxpayers. They said that business compliance burden is increased as businesses attempt to understand and respond to those notices and letters. Our last detailed examinations of IRS notices, forms, and publications, in December 1994, revealed continuing problems with these documents. IRS has been making efforts to resolve some of those problems. Respondents also identified difficulties in complying with the code because regulations were not always available from IRS in a timely manner. IRS officials said that the amount of time that passes before a final regulation is issued varies, but it can take several years or longer. According to the officials, the amount of time is a product of the complexity of the particular tax provision, the process of obtaining and analyzing public comment on proposed regulations, and the priority IRS assigns to issuing the regulation. For many tax provisions businesses depend upon IRS regulations for guidance in complying with the code and correspondingly reducing their burden. Without timely regulations, according to some respondents, businesses must guess at the proper application of the law and then at times amend their decisions when the regulations are finally issued. Moving next, Mr. Chairman, to the overall cost to businesses of complying with the tax code, we did not identify a readily available, reliable estimate of such costs. While there was a general consensus that compliance is burdensome and some businesses offered anecdotal examples of their costs, our discussions with businesses and review of available studies indicate that developing a reliable estimate would require that several practical and severe problems be overcome. These problems include working with a broad spectrum of businesses to accurately separate tax costs from other costs and obtaining accurate and consistent responses from businesses on tax burden questions. This kind of inquiry would be an expensive and burdensome process in itself. primarily for tax reasons. More often, tax considerations affected the timing or structure of a business action not whether the action would occur. For example, in acquiring a business equipment would consider tax implications in terms of whether to buy or lease the equipment. Few of the businesses we spoke with could readily separate tax compliance costs from other costs of doing business. The integration of the tax compliance activities with other business activities makes it difficult and time-consuming to collect the information necessary from businesses to generate reliable cost estimates. For example, businesses said it would be difficult to take payroll expenditures and isolate those associated with tax compliance. Further, business respondents said that they do not routinely need, thus it does not make sense for them to collect, information on compliance costs. And, to separate tax compliance costs from other costs of doing business would be burdensome and of questionable usefulness to them. A few business officials provided estimates of some compliance costs, such as legal fees, payroll management fees, and tax software expenditures, but expressed limited confidence in their ability to provide accurate, comprehensive cost data. In addition, those few businesses that said they could isolate some of their tax compliance costs indicated that even in their cases, it would be difficult to separate federal compliance costs from state and local compliance costs. While we did not identify existing reliable business tax burden cost estimates, there was consensus among the business respondents, tax experts, and the literature that tax compliance burden is significant and that it can be reduced. Although some gains can be made by reducing administrative burden imposed by IRS, the greatest potential for reducing the compliance burden of business taxpayers is by dealing with the complexity of the tax code. provisions has the potential for reducing the compliance burden of many businesses. Another approach that has been proposed is to completely overhaul the tax code by replacing the current income tax with some form of consumption tax. In considering changes to the tax code, whether they be limited in nature or comprehensive, legislators need to weigh several sometimes competing concerns. These include the revenue implications of any change, the need to address equity and fairness, and the desire to achieve social and economic goals. The tension in achieving balance among these trade-offs and at the same time making it easier for taxpayers to comply presents a significant challenge to Congress. The tax system is burdensome for many individuals as well as for businesses. Almost 100 million American taxpayers currently must file individual tax returns, even though most have fully paid their taxes through the withholding system. To assist the Congress in identifying options for reducing taxpayer burden and IRS paper processing, we are in the process of studying return-free filing systems and the potential impact they would have on the federal income tax system. While we are still finalizing our results, we can provide some preliminary information on (1) the two most common types of return-free filing used in other countries, (2) the number of individual American taxpayers that could be affected by these two types of return-free filing, and (3) some of the issues that would need to be addressed if these systems were to be considered. In countries with return-free filing, the most common type of system we identified was one that we termed "final withholding." Under this system, the withholder of income taxes--for example an employer--is to determine the taxpayer's liability and withhold the correct tax liability from the taxpayer. With the final year-end payment to the taxpayer, the withholder is to make a final reconciliation of taxes and adjust the withholding for that period to equal the year's taxes. on the tax liability and the amount of withholding. We identified 36 countries that use one of these two forms of return-free filing--34 with final withholding and 2 with tax agency reconciliation. Given the extent of withholding and information reporting that exists under our current tax system, we estimated that about 18.5 million American taxpayers whose incomes derive from only one employer could be covered under a final withholding system. An estimated 51 million taxpayers could be covered under an agency reconciliation system. We estimated that taxpayers could save millions of hours in preparation time and millions of dollars in tax preparation costs under either the final withholding system or the tax agency reconciliation system. We also estimated that IRS would save about $45 million in processing costs under the final withholding system, and about $36 million under the tax agency reconciliation system, in processing and compliance costs. However, employers would face substantial additional burden and costs under the final withholding system and the tax preparation industry could be adversely affected under either system. Furthermore, several changes to the current tax system would be needed in order to implement either form of return-free filing. Under both systems, taxpayers would continue to provide information to IRS on their filing status and number of dependents. Employers would need to be authorized by law to compute and remit tax liabilities under final withholding and they would have to set up payroll procedures to do so. Consideration would also need to be given to the impact of these systems on certain states where the state income tax is tied to the federal income tax return. For example, IRS would have to speed up the processing of information documents under the tax agency reconciliation system so that tax liabilities could be determined before April 15, which is also the tax filing deadline for some states. IRS' own 1987 study of return-free filing recognized this processing problem and recommended against a tax agency reconciliation return-free filing system for that reason. As IRS improves its information processing capabilities, return-free filing may become more feasible. evaluation of ways in which tax compliance burden can be reduced is an important contribution to improving our tax system. Mr. Chairman, Representative Shadegg, this concludes our prepared statement. We would be pleased to answer any questions. Our approach for (1) identifying the sources of compliance burden for businesses and (2) determining the feasibility of obtaining reliable estimates of the compliance costs borne by businesses was to review and assess the literature on tax compliance burden to identify issues and to conduct in-depth interviews of businesses and tax experts to obtain their views on compliance burden. We reviewed about 25 commonly recognized studies from the literature on compliance costs and tax simplification. These studies provided information on how businesses comply with tax laws, the areas they find more difficult to comply with, causes for some of the tax compliance burden experienced by businesses, and suggestions for reducing compliance burden. We interviewed business officials and tax experts to obtain detailed information on actual taxpayer experiences in complying with federal, state, and local tax requirements and to determine if companies could collect reliable taxpayer compliance cost data. These included interviews with tax and management officials of 17 businesses, three panels of tax accountants from the American Institute of Certified Public Accountants (AICPA), and a panel of tax lawyers from the American Bar Association (ABA) Tax Section. We also talked with representatives of tax associations and IRS officials to obtain their views on the reasons for tax compliance burden. We selected the 17 businesses to include a variety of geographic regions, industry types, and sizes, rather than to construct a statistical sample of businesses. The 17 companies were headquartered in 6 states across the country--California, Georgia, Maryland, New York, Ohio, and Virginia. They included a wide variety of industry types, such as manufacturing, services, telecommunications, and retail operations. We chose to focus, for the most part, on medium-sized companies because, among other things, relatively little past research has focused on this subgroup. Our sample included, however, a few large corporations and some relatively small businesses. Most of the 17 businesses were judgmentally selected from public databases that list publicly traded and privately held corporations. Table 1 summarizes the characteristics of the 17 companies we interviewed. encountered while complying with federal, state, and local tax systems. Moreover, our results on the sources of tax compliance burden are consistent with the information found in the literature we reviewed. The first copy of each GAO report and testimony is free. Additional copies are $2 each. 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GAO discussed business and individual taxpayers' federal tax compliance burden. GAO noted that: (1) the compliance burden is due to the tax code's complexity, ambiguous language, and frequent changes; (2) many businesses are uncertain about what they must do to comply with the code; (3) recordkeeping, time-consuming calculations, the interplay of state and local tax requirements, and Internal Revenue Service's (IRS) administration of the tax code add to the burden; (4) estimating businesses' tax compliance burden and costs would be difficult, since businesses do not collect the data needed to make reliable cost estimates of their compliance; (5) the greatest reduction in the tax compliance burden could be gained by simplifying the tax code; (6) return-free filing alternatives used in other countries could reduce individual taxpayers' tax compliance and IRS administrative burdens, but employers, tax preparers, and state tax systems could be further burdened or adversely affected; and (7) reducing businesses' and individuals' tax compliance burdens will be difficult because of tax policy tradeoffs, such as revenue, equity, and social and economic issues.

Wildland fire triggered by lightning is a normal, inevitable, and necessary ecological process that nature uses to periodically remove excess undergrowth, small trees, and vegetation to renew ecosystem productivity. However, various human land use and management practices, including several decades of fire suppression activities, have reduced the normal frequency of wildland fires in many forest and rangeland ecosystems and have resulted in abnormally dense and continuous accumulations of vegetation that can fuel uncharacteristically large and intense wildland fires. Such large intense fires increasingly threaten catastrophic ecosystem damage and also increasingly threaten human lives, health, property, and infrastructure in the wildland-urban interface. Federal researchers estimate that vegetative conditions that can fuel such fires exist on approximately 190 million acres--or more than 40 percent--of federal lands in the contiguous United States but could vary from 90 million to 200 million acres, and that these conditions also exist on many nonfederal lands. Our reviews over the last 5 years identified several weaknesses in the federal government's management response to wildland fire issues. These weaknesses included the lack of a national strategy that addressed the likely high costs of needed fuel reduction efforts and the need to prioritize these efforts. Our reviews also found shortcomings in federal implementation at the local level, where over half of all federal land management units' fire management plans did not meet agency requirements designed to restore fire's natural role in ecosystems consistent with human health and safety. These plans are intended to identify needed local fuel reduction, preparedness, suppression, and rehabilitation actions. The agencies also lacked basic data, such as the amount and location of lands needing fuel reduction, and research on the effectiveness of different fuel reduction methods on which to base their fire management plans and specific project decisions. Furthermore, coordination among federal agencies and collaboration between these agencies and nonfederal entities were ineffective. This kind of cooperation is needed because wildland fire is a shared problem that transcends land ownership and administrative boundaries. Finally, we found that better accountability for federal expenditures and performance in wildland fire management was needed. Agencies were unable to assess the extent to which they were reducing wildland fire risks or to establish meaningful fuel reduction performance measures, as well as to determine the cost- effectiveness of these efforts, because they lacked both monitoring data and sufficient data on the location of lands at high risk of catastrophic fires to know the effects of their actions. As a result, their performance measures created incentives to reduce fuels on all acres, as opposed to focusing on high-risk acres. Because of these weaknesses, and because experts said that wildland fire problems could take decades to resolve, we said that a cohesive, long- term, federal wildland fire management strategy was needed. We said that this cohesive strategy needed to focus on identifying options for reducing fuels over the long term in order to decrease future wildland fire risks and related costs. We also said that the strategy should identify the costs associated with those different fuel reduction options over time, so that the Congress could make cost-effective, strategic funding decisions. The federal government has made important progress over the last 5 years in improving its management of wildland fire. Nationally it has established strategic priorities and increased resources for implementing these priorities. Locally, it has enhanced data and research, planning, coordination, and collaboration with other parties. With regard to accountability, it has improved performance measures and established a monitoring framework. Over the last 5 years, the federal government has been formulating a national strategy known as the National Fire Plan, composed of several strategic documents that set forth a priority to reduce wildland fire risks to communities. Similarly, the recently enacted Healthy Forests Restoration Act of 2003 directs that at least 50 percent of funding for fuel reduction projects authorized under the act be allocated to wildland-urban interface areas. While we have raised concerns about the way the agencies have defined these areas and the specificity of their prioritization guidance, we believe that the act's clarification of the community protection priority provides a good starting point for identifying and prioritizing funding needs. Similarly, in contrast to fiscal year 1999, when we reported that the Forest Service had not requested increased funding to meet the growing fuel reduction needs it had identified, fuel reduction funding for both the Forest Service and Interior quadrupled by fiscal year 2004. The Congress, in the Healthy Forests Restoration Act, also authorized $760 million per year to be appropriated for hazardous fuels reduction activities, including projects for reducing fuels on up to 20 million acres of land. Moreover, appropriations for both agencies' overall wildland fire management activities, including preparedness, suppression and rehabilitation, have nearly tripled, from about $1 billion in fiscal year 1999 to over $2.7 billion in fiscal year 2004. The agencies have strengthened local wildland fire management implementation by making significant improvements in federal data and research on wildland fire over the past 5 years, including an initial mapping of fuel hazards nationwide. Additionally, in 2003, the agencies approved funding for development of a geospatial data and modeling system, called LANDFIRE, to map wildland fire hazards with greater precision and uniformity. LANDFIRE--estimated to cost $40 million and scheduled for nationwide implementation in 2009--will enable comparisons of conditions between different field locations nationwide, thus permitting better identification of the nature and magnitude of wildland fire risks confronting different community and ecosystem resources, such as residential and commercial structures, species habitat, air and water quality, and soils. The agencies also have improved local fire management planning by adopting and executing an expedited schedule to complete plans for all land units that had not been in compliance with agency requirements. The agencies also adopted a common interagency template for preparing plans to ensure greater consistency in their contents. Coordination among federal agencies and their collaboration with nonfederal partners, critical to effective implementation at the local level, also has been improved. In 2001, as a result of congressional direction, the agencies jointly formulated a 10-Year Comprehensive Strategy with the Western Governors' Association to involve the states as full partners in their efforts. An implementation plan adopted by the agencies in 2002 details goals, time lines, and responsibilities of the different parties for a wide range of activities, including collaboration at the local level to identify fuel reduction priorities in different areas. Also in 2002, the agencies established an interagency body, the Wildland Fire Leadership Council, composed of senior Agriculture and Interior officials and nonfederal representatives, to improve coordination of their activities with each other and nonfederal parties. Accountability for the results the federal government achieves from its investments in wildland fire management activities also has been strengthened. The agencies have adopted a performance measure that identifies the amount of acres moved from high-hazard to low-hazard fuel conditions, replacing a performance measure for fuel reductions that measured only the total acres of fuel reductions and created an incentive to treat less costly acres rather than the acres that presented the greatest hazards. Additionally, in 2004, to have a better baseline for measuring progress, the Wildland Fire Leadership Council approved a nationwide framework for monitoring the effects of wildland fire. While an implementation plan is still needed for this framework, it nonetheless represents a critical step toward enhancing wildland fire management accountability. While the federal government has made important progress over the past 5 years in addressing wildland fire, a number of challenges still must be met to complete development of a cohesive strategy that explicitly identifies available long-term options and funding needed to reduce fuels on the nation's forests and rangelands. Without such a strategy, the Congress will not have an informed understanding of when, how, and at what cost wildland fire problems can be brought under control. None of the strategic documents adopted by the agencies to date have identified these options and related funding needs, and the agencies have yet to delineate a plan or schedule for doing so. To identify these options and funding needs, the agencies will have to address several challenging tasks related to their data systems, fire management plans, and assessing the cost-effectiveness and affordability of different options for reducing fuels. The agencies face several challenges to completing and implementing LANDFIRE, so that they can more precisely identify the extent and location of wildland fire threats and better target fuel reduction efforts. These challenges include using LANDFIRE to better reconcile the effects of fuel reduction activities with the agencies' other stewardship responsibilities for protecting ecosystem resources, such as air, water, soils, and species habitat, which fuel reduction efforts can adversely affect. The agencies also need LANDFIRE to help them better measure and assess their performance. For example, the data produced by LANDFIRE will help them devise a separate performance measure for maintaining conditions on low-hazard lands to ensure that their conditions do not deteriorate to more hazardous conditions while funding is being focused on lands with high-hazard conditions. In implementing LANDFIRE, however, the agencies will have to overcome the challenges presented by the current lack of a consistent approach to assessing the risks of wildland fires to ecosystem resources as well as the lack of an integrated, strategic, and unified approach to managing and using information systems and data, including those such as LANDFIRE, in wildland fire decision making. Currently, software, data standards, equipment, and training vary among the agencies and field units in ways that hamper needed sharing and consistent application of the data. Also, LANDFIRE data and models may need to be revised to take into account recent research findings that suggest part of the increase in wildland fire in recent years has been caused by a shift in climate patterns. This research also suggests that these new climate patterns may continue for decades, resulting in further increases in the amount of wildland fire. Thus, the nature, extent, and geographical distribution of hazards initially identified in LANDFIRE, as well as the costs for addressing them, may have to be reassessed. The agencies will need to update their local fire management plans when more detailed, nationally consistent LANDFIRE data become available. The plans also will have to be updated to incorporate recent agency fire research on approaches to more effectively address wildland fire threats. For example, a 2002 interagency analysis found that protecting wildland- urban interface communities more effectively--as well as more cost- effectively--might require locating a higher proportion of fuel reduction projects outside of the wildland-urban interface than currently envisioned, so that fires originating in the wildlands do not become too large to suppress by the time they arrive at the interface. Moreover, other agency research suggests that placing fuel reduction treatments in specific geometric patterns may, for the same cost, provide protection for up to three times as many community and ecosystem resources as do other approaches, such as placing fuel breaks around communities and ecosystems resources. Timely updating of fire management plans with the latest research findings on optimal design and location of treatments also will be critical to the effectiveness and cost-effectiveness of these plans. The Forest Service indicated that this updating could occur during annual reviews of fire management plans to determine whether any changes to them may be needed. Completing the LANDFIRE data and modeling system and updating fire management plans should enable the agencies to formulate a range of options for reducing fuels. However, to identify optimal and affordable choices among these options, the agencies will have to complete certain cost-effectiveness analysis efforts they currently have under way. These efforts include an initial 2002 interagency analysis of options and costs for reducing fuels, congressionally-directed improvements to their budget allocation systems, and a new strategic analysis framework that considers affordability. The Interagency Analysis of Options and Costs: In 2002, a team of Forest Service and Interior experts produced an estimate of the funds needed to implement eight different fuel reduction options for protecting communities and ecosystems across the nation over the next century. Their analysis also considered the impacts of fuels reduction activities on future costs for other principal wildland fire management activities, such as preparedness, suppression, and rehabilitation, if fuels were not reduced. The team concluded that the option that would result in reducing the risks to communities and ecosystems across the nation could require an approximate tripling of current fuel reduction funding to about $1.4 billion for an initial period of a few years. These initially higher costs would decline after fuels had been reduced enough to use less expensive controlled burning methods in many areas and more fires could be suppressed at lower cost, with total wildland fire management costs, as well as risks, being reduced after 15 years. Alternatively, the team said that not making a substantial short-term investment using a landscape focus could increase both costs and risks to communities and ecosystems in the long term. More recently, however, Interior has said that the costs and time required to reverse current increasing risks may be less when other vegetation management activities--such as timber harvesting and habitat improvements--are considered that were not included in the interagency team's original assessment but also can influence wildland fire. The cost of the 2002 interagency team's option that reduced risks to communities and ecosystems over the long term is consistent with a June 2002 National Association of State Foresters' projection of the funding needed to implement the 10-Year Comprehensive Strategy developed by the agencies and the Western Governors' Association the previous year. The state foresters projected a need for steady increases in fuel reduction funding up to a level of about $1.1 billion by fiscal year 2011. This is somewhat less than that of the interagency team's estimate, but still about 2-1/2 times current levels. The interagency team of experts who prepared the 2002 analysis of options and associated costs said their estimates of long-term costs could only be considered an approximation because the data used for their national-level analysis were not sufficiently detailed. They said a more accurate estimate of the long-term federal costs and consequences of different options nationwide would require applying this national analysis framework in smaller geographic areas using more detailed data, such as that produced by LANDFIRE, and then aggregating these smaller-scale results. The New Budget Allocation System: Agency officials told us that a tool for applying this interagency analysis at a smaller geographic scale for aggregation nationally may be another management system under development--the Fire Program Analysis system. This system, being developed in response to congressional committee direction to improve budget allocation tools, is designed to identify the most cost-effective allocations of annual preparedness funding for implementing agency field units' local fire management plans. Eventually, the Fire Program Analysis system, being initially implemented in 2005, will use LANDFIRE data and provide a smaller geographical scale for analyses of fuel reduction options and thus, like LANDFIRE, will be critical for updating fire management plans. Officials said that this preparedness budget allocation systemwhen integrated with an additional component now being considered for allocating annual fuel reduction funding--could be instrumental in identifying the most cost-effective long-term levels, mixes, and scheduling of these two wildland fire management activities. Completely developing the Fire Program Analysis system, including the fuel reduction funding component, is expected to cost about $40 million and take until at least 2007 and perhaps until 2009. The New Strategic Analysis Effort: In May 2004, Agriculture and Interior began the initial phase of a wildland fire strategic planning effort that also might contribute to identifying long-term options and needed funding for reducing fuels and responding to the nation's wildland fire problems. This effortthe Quadrennial Fire and Fuels Reviewis intended to result in an overall federal interagency strategic planning document for wildland fire management and risk reduction and to provide a blueprint for developing affordable and integrated fire preparedness, fuels reduction, and fire suppression programs. Because of this effort's consideration of affordability, it may provide a useful framework for developing a cohesive strategy that includes identifying long-term options and related funding needs. The preliminary planning, analysis, and internal review phases of this effort are currently being completed and an initial report is expected in March 2005. The improvements in data, modeling, and fire behavior research that the agencies have under way, together with the new cost-effectiveness focus of the Fire Program Analysis system to support local fire management plans, represent important tools that the agencies can begin to use now to provide the Congress with initial and successively more accurate assessments of long-term fuel reduction options and related funding needs. Moreover, a more transparent process of interagency analysis in framing these options and their costs will permit better identification and resolution of differing assumptions, approaches, and values. This transparency provides the best assurance of accuracy and consensus among differing estimates, such as those of the interagency team and the National Association of State Foresters. In November 2004, the Western Governors' Association issued a report prepared by its Forest Health Advisory Committee that assessed implementation of the 10-Year Comprehensive Strategy, which the association had jointly devised with the agencies in 2001. Although the association's report had a different scope than our review, its findings and recommendations are, nonetheless, generally consistent with ours about the progress made by the federal government and the challenges it faces over the next 5 years. In particular, it recommends, as we do, completion of a long-term federal cohesive strategy for reducing fuels. It also cites the need for continued efforts to improve, among other things, data on hazardous fuels, fire management plans, the Fire Program Analysis system, and cost-effectiveness in fuel reductions--all challenges we have emphasized today. The progress made by the federal government over the last 5 years has provided a sound foundation for addressing the problems that wildland fire will increasingly present to communities, ecosystems, and federal budgetary resources over the next few years and decades. But, as yet, there is no clear single answer about how best to address these problems in either the short or long term. Instead, there are different options, each needing further development to understand the trade-offs among the risks and funding involved. The Congress needs to understand these options and tradeoffs in order to make informed policy and appropriations decisions on this 21st century challenge. This is the same message we provided to this subcommittee 5 years ago in calling for a cohesive strategy that identified options and funding needs. But it still has not been completed. While the agencies are now in a better position to do so, they must build on the progress made to date by completing data and modeling efforts underway, updating their fire management plans with the results of these data efforts and ongoing research, and following through on recent cost-effectiveness and affordability initiatives. However, time is running out. Further delay in completing a strategy that cohesively integrates these activities to identify options and related funding needs will only result in increased long-term risks to communities, ecosystems, and federal budgetary resources. Because there is an increasingly urgent need for a cohesive federal strategy that identifies long-term options and related funding needs for reducing fuels, we have recommended that the Secretaries of Agriculture and the Interior provide the Congress, in time for its consideration of the agencies' fiscal year 2006 wildland fire management budgets, with a joint tactical plan outlining the critical steps the agencies will take, together with related time frames, to complete such a cohesive strategy. Mr. Chairman, this concludes my prepared 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 about this testimony, please contact me at (202) 512-3841 or at [email protected]. Jonathan Altshul, David P. Bixler, Barry T. Hill, Richard Johnson, and Chester Joy made key contributions to this statement. 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Over the past two decades, the number of acres burned by wildland fires has surged, often threatening human lives, property, and ecosystems. Past management practices, including a concerted federal policy in the 20th century of suppressing fires to protect communities and ecosystem resources, unintentionally resulted in steady accumulation of dense vegetation that fuels large, intense, wildland fires. While such fires are normal in some ecosystems, in others they can cause catastrophic damage to resources as well as to communities near wildlands known as the wildland-urban interface. GAO was asked to identify the (1) progress the federal government has made in responding to wildland fire threats and (2) challenges it will need to address within the next 5 years. This testimony is based primarily on GAO's report Wildland Fire Management: Important Progress Has Been Made, but Challenges Remain to Completing a Cohesive Strategy (GAO-05-147), released on February 14, 2005. Over the last 5 years, the Forest Service in the Department of Agriculture and land management agencies in the Department of the Interior, working with the Congress, have made important progress in responding to wildland fires. The agencies have adopted various national strategy documents addressing the need to reduce wildland fire risks; established a priority for protecting communities in the wildland-urban interface; and increased efforts and amounts of funding committed to addressing wildland fire problems, including preparedness, suppression, and fuel reduction on federal lands. In addition, the agencies have begun improving their data and research on wildland fire problems, made progress in developing long-needed fire management plans that identify actions for effectively addressing wildland fire threats at the local level, and improved federal interagency coordination and collaboration with nonfederal partners. The agencies also have strengthened overall accountability for their investments in wildland fire activities by establishing improved performance measures and a framework for monitoring results. While the agencies have adopted various strategy documents to address the nation's wildland fire problems, none of these documents constitutes a cohesive strategy that explicitly identifies the long-term options and related funding needed to reduce fuels in national forests and rangelands and to respond to wildland fire threats. Both the agencies and the Congress need a comprehensive assessment of the fuel reduction options and related funding needs to determine the most effective and affordable long-term approach for addressing wildland fire problems. Completing a cohesive strategy that identifies long-term options and needed funding will require finishing several efforts now under way, each with its own challenges. The agencies will need to finish planned improvements in a key data and modeling system--LANDFIRE--to more precisely identify the extent and location of wildland fire threats and to better target fuel reduction efforts. In implementing LANDFIRE, the agencies will need more consistent approaches to assessing wildland fire risks, more integrated information systems, and better understanding of the role of climate in wildland fire. In addition, local fire management plans will need to be updated with data from LANDFIRE and from emerging agency research on more cost-effective approaches to reducing fuels. Completing a new system designed to identify the most cost-effective means for allocating fire management budget resources--Fire Program Analysis--may help to better identify long-term options and related funding needs. Without completing these tasks, the agencies will have difficulty determining the extent and location of wildland fire threats, targeting and coordinating their efforts and resources, and resolving wildland fire problems in the most timely and cost-effective manner over the long term. A November 2004 report of the Western Governors' Association also called for completing a cohesive federal strategy to address wildland fire problems.

The International Boundary and Water Commission was established in March 1889 by treaty between the governments of the United States and Mexico. Under the treaty and subsequent agreements, the Commission is responsible for resolving boundary problems and maintaining the boundary between the United States and Mexico and managing issues involving the waters of the Rio Grande and Colorado Rivers. The focus of Commission responsibilities has evolved over time to include resolving border water quality problems and, more recently, to designing, constructing, and operating and maintaining wastewater treatment facilities along the border (see fig. 1). Much of this change in responsibilities has occurred in response to the expansion of economic activity and the growth of population along the border. These developments have heightened the need for additional water sources and an enhanced environmental infrastructure. 2000 The International Boundary and Water Commission is composed of a U.S. Section and a Mexican Section, each headed by a Commissioner, who must be an engineer. The U.S. Commissioner is appointed by the President for an indefinite term. The current Commissioner was appointed on June 15, 1994. The U.S. Section is located in El Paso, Texas; the Mexican Section is in the adjoining city of Ciudad Juarez, (Chihuahua) Mexico. As of July 1998, the U.S. Section had 254 staff at its headquarters and project offices located along the border. (See fig. 2.) The U.S. Section must comply with applicable federal rules and regulations regarding financial management and contracting, including the Federal Acquisition Regulation. When problems such as the need for wastewater treatment plants on the border require joint actions to resolve, the two Commissioners work together to define the problem, plan the solution, and negotiate the level of participation for each country. The Commissioners jointly prepare draft agreements (referred to as "Minutes") on all aspects of each country's participation (including cost-sharing arrangements) to present to both countries' governments for approval. For joint projects determined to require binding international obligations, the U.S. Commissioner must obtain the approval of the Secretary of State. The U.S. Section receives its direct appropriations through the Department of State's budget. The Section's appropriations for salaries, expenses, and construction activities totaled $85.7 million from fiscal years 1994 through 1997. The Section also receives contributions from federal, state, and local municipalities and the government of Mexico to help construct new projects and operate and maintain existing facilities, such as wastewater treatment plants. Contributions for these purposes totaled approximately $132.2 million from fiscal years 1994 through 1997. Total funding for the 4-year period, therefore, came to approximately $217.9 million, as shown in table 1. EPA provided $123 million during this period. Approximately $108 million was provided to construct wastewater treatment facilities along the border; another $15 million was given for the administration of an EPA-supported facilities planning program for resolving border sanitation problems. The remaining funds were provided by Mexico ($1.6 million), the General Services Administration and the Western Area Power Administration ($1.9 million), local municipalities ($4.4 million), and other ($1.3 million). The U.S. Section received funds totaling approximately $46.7 million in fiscal year 1997. These funds were used for U.S. Section operations, project engineering activities, operation and maintenance of existing projects, and construction activities. The expenditures included payments for personnel and benefits, training, travel, and supplies and materials; operating and maintaining field offices, dams, and sanitation plants; monitoring river water quality; and directing various construction projects. (See table 2.) Our examination of certain aspects of the U.S. Section's financial and accounting system found several weaknesses. These weaknesses included problems in recording reimbursements and accounting for funds owed by Mexico. We also observed that the U.S. Section did not follow applicable internal control standards regarding separation of duties and had not yet corrected previously identified financial management deficiencies. In addition, we noted that the U.S. Section has had no external financial statement audits conducted since 1995. In light of prior audit findings and the size of reimbursements to the U.S. Section by Mexico, we examined the U.S. Section's accounting procedures for billings to Mexico. We found that the U.S. Section had not corrected deficiencies identified in prior external audit reports. In fact, we observed that approximately $16 million owed by Mexico for construction and operations and maintenance costs, including $400,000 that had been billed between July 23, 1997, and March 6, 1998, was not properly recorded as required by generally accepted accounting principles for federal financial reporting purposes. These billings were for the South Bay, California, and Nogales, Arizona, Wastewater Treatment facilities. Since these receivables were not included in the accounting records, the U.S. Section's financial statements and reports did not reflect the Section's true financial position. This discrepancy occurred because the U.S. Section lacks an integrated accounting system. For example, record-keeping for funds owed by Mexico was maintained independently from the accounting and finance system. However, the U.S. Section subsequently provided documentation to adequately support payments made. To reduce the risk of error, waste, or wrongful acts and ensure that effective checks and balances exist, "Standards for Internal Controls in the Federal Government" require a separation of duties and responsibilities. Our review of selected U.S. Section disbursements in fiscal years 1997-98 identified that the individual who created an obligation for an expenditure also had the authority to approve a bill for payment without any requirement for approval from contracting or procurement officials that goods or services were received. This scenario is inconsistent with the guidance contained in the "Standards for Internal Controls in the Federal Government," which call for the separation of duties. To ensure that resources are not put at risk and that financial reports are based on accurate data, federal internal control standards require prompt resolution of audit findings. We found that the U.S. Section had not corrected 11 of 26 deficiencies, or about 42 percent, identified in annual financial statement audits conducted from fiscal years 1992 through 1995. As these deficiencies remained, the U.S. Section was vulnerable to unreliable financial reporting, noncompliance with laws and regulations, and inadequate safeguarding of assets. The 11 deficiencies that the U.S. Section had not corrected include no procedures for tracking and recording costs to prepare annual financial no monitoring of receivable accounts and failure to assess interest on late payments; insufficient procedures to record amounts due from state and local governments and the government of Mexico to ensure that all amounts due were properly recorded; outdated and/or incomplete written accounting policies and procedures; no performance of periodic vulnerability assessments and tests of internal no system directive providing policy guidance to establish a single, integrated financial management system; no submission of payment performance data to the Office of Management and Budget as required by the Prompt Payment Act of 1983; no audit follow-up system or procedures to evaluate the system; no system to identify and monitor compliance with applicable laws and no performance of periodic, independent reviews of electronic data no performance of periodic, physical counts of inventory on hand. We examined the negotiated cost-sharing arrangements for the five most recent Commission projects undertaken jointly by the United States and Mexico. These projects had terms that varied from those for the other three. For three projects--two wastewater treatment plants and a cross-border bridge--each country assumed full responsibility for their respective project costs. However, for the other two projects--the Nogales Wastewater Treatment Plant, completed in 1992, and the South Bay Wastewater Treatment Plant, completed in 1998--the United States financed Mexico's share of the construction costs with a no-interest loan. Mexico will repay the loaned funds in 10 annual installments and was given a grace period until the plants were fully operational to initiate repayment. Mexico's agreed-upon shares of the construction costs for the Nogales and South Bay projects were $1 million and $16.8 million, respectively. In present value terms, the net cost to the United States to finance Mexico's share for the two projects is approximately $8.6 million, as shown in table 3. U.S. Section and Department of State officials informed us that this type of arrangement was made by the United States, following negotiation with Mexico, in response to the state of the Mexican economy and the dire need to build these joint projects in the United States, which is the preferred location from technical points of view, but where costs and standards are higher than in Mexico. This arrangement was made due to the strong desire on the part of the U.S. communities, with the support of their congressional delegations, that these two projects go forward expeditiously. The primary tool used to validate payment claims by contractors is monthly reports prepared by the on-site contract operations representative. We found that the contract operations representative did not submit these required monthly reports on the performance of the contractors at the international wastewater treatment facilities at South Bay, California, and Nogales, Arizona, to the contract administrator. The reports were not submitted because the reporting requirement was not enforced by the contract administrator. As a result, payments of $1.2 million were made without proper documentation demonstrating that the required work had been completed. U.S. Section officials agreed with our findings. They issued directives to the U.S. Section's on-site representatives at both facilities stating that the representatives should immediately begin submitting written reports evaluating the contractor's overall performance and documenting specific performance for each month's work. Oversight of the U.S. Section of the Commission is minimal. While the Department of State reviews the U.S. Section's budget requests and provides foreign policy guidance to the section, the Department told us that it does not have the authority to routinely monitor or oversee the management of the U.S. Section because the Section is not a constituent part of the Department of State. And, EPA's oversight authority over the Commission's operations is limited to construction projects for which it provides funding. In addition, there is no requirement that financial or program audits of the U.S. Section be conducted. In fact, the U.S. Section has not undergone an external program review since 1980, and, as pointed out earlier, no financial statement audit has taken place since 1995. Moreover, internal audits were not being conducted. Good management practices call for periodic program audits to determine the extent to which the organization is achieving the desired results or benefits established by its charter, the effectiveness of its programs and activities, and the compliance with the laws and regulations applicable to its programs. The U.S. Section has received no external program audits of its activities since 1980. The Commission acts as the project manager for selected EPA-funded projects along the southwest border. EPA officials informed us that they (1) review U.S. Section construction contracts, (2) monitor disbursement of project funds, (3) participate in periodic sessions to review the progress of projects with the U.S. Section and other involved agencies, and (4) conduct periodic site visits. They also said that, when appropriate, they contract with other entities to inspect actual construction activities. With respect to contracting, EPA provides advice to the Commission on both technical and business issues. However, EPA's review focuses only on contracts for which it provides funding. While the head of the Department of State's Office of Mexican Affairs told us that the Department does not routinely exercise management oversight, the Department's Inspector General said that it has authority to conduct audits and contracted for financial statement audits from 1992 to 1995. However, in a July 1998 letter, State's Inspector General informed us that the Inspector General has not conducted audits since 1995 due to resource constraints. Our review also found that the U.S. Section did not have a well-functioning internal audit capability. The U.S. Section recognizes that internal audit is to be used to determine, through unbiased examinations, that operations are efficient and economical and that other internal controls are sufficient, adequate, and consistently applied. Although the U.S. Section had a compliance office with internal audit responsibilities, the head of the office stated that he was working on other critical personnel issues. He told us that 10 audits had been scheduled for 1998, but no audits had been completed to date. In a July 29, 1998, letter to us, the U.S. Commissioner agreed with our observations regarding the Section's financial and accounting systems' weaknesses. The Commissioner told us that actions had been taken or were in process to (1) correct general ledger accounts to assure that the accounting reports reflect correct accounts receivable amounts, (2) establish proper segregation of duties and assure that all payments are approved by contracting officers, (3) correct previously identified weaknesses, and (4) provide the internal auditor more time to conduct audits. In light of the Commissioner's actions, this report contains no recommendations for corrective actions regarding the Section's financial and accounting systems. Border issues between the United States and Mexico form an increasingly critical part of the bilateral relationship. The Commission is involved in a growing number of issues along the U.S.-Mexico border. The expected increase in commerce between the two countries and the resulting impact on the environmental infrastructure are likely to expand the importance of the Commission's operations. Moreover, in addition to its own annual appropriations, the Commission directs funding from other federal, state, and local sources. In light of our findings regarding the finance and accounting systems, including the failure to correct previously identified weaknesses, weaknesses in contract administration, and minimal oversight of programs and activities and the significance of the U.S. Section's activities, we believe greater oversight of the U.S. Section's financial and program operations is needed. In order to provide greater oversight over International Boundary and Water Commission operations, Congress may wish to consider requiring the U.S. Commissioner to obtain annual financial statement audits of the U.S. Section's activities by an independent accounting firm in accordance with generally accepted government auditing standards. In written comments on a draft of this report, the State Department agreed with our matter for congressional consideration. The Department also provided technical comments, which we have incoporated in the report where appropriate. The Department of State's comments are reprinted in appendix II. The EPA reviewed a draft of this report and had no comments. We are sending copies of this report to the Secretary of State; the Administrator, EPA; and the U.S. Commissioner of the International Boundary and Water Commission. Copies will also be made available to other interested parties on request. If you or your staff have any questions concerning this report, please call me at (202) 512-4128. Major contributors to this report are listed in appendix III. Our objectives were to examine (1) the sources and uses of the funds for the U.S. Section of the International Boundary and Water Commission, (2) certain aspects of the U.S. Section's system of accounting and internal controls, (3) the cost-sharing arrangements for joint projects between the United States and Mexico, (4) the administration of U.S. Section construction and operations and maintenance contracts, and (5) the extent of oversight over the U.S. Section's programs and operations. We conducted our review at the Department of State and the Environmental Protection Agency (EPA) in Washington, D.C.; the International Boundary and Water Commission's U.S. Section in El Paso, Texas; the International Wastewater Treatment plants in Nogales, Arizona, and South Bay, California; and at EPA Region 9 in San Francisco, California. At all these locations, we examined available program records and files and interviewed knowledgeable officials involved with the Commission's activities. We did not conduct a full internal control review nor a financial audit of the U.S. Section. Instead, we focused on key aspects of U.S. Section activities that were related to our audit objectives. Further, we did not evaluate the effectiveness of the U.S. Section's activities. To identify the amount of the U.S. Section's direct appropriation, we reviewed the U.S. Department of State's appropriation data for fiscal years 1994 to 1998 and its budget request for fiscal year 1999. Specifically, we analyzed the U.S. Section's funding development schedules, Department of State apportionment schedules, and reports on budget execution. To identify those funding sources in addition to the direct appropriation, we analyzed records supporting the U.S. Section's financial statement. We reviewed the funds reimbursed to the U.S. Section for construction, as well as for operations and maintenance expenses from Mexico, other federal agencies (such as EPA), and state and local municipalities. We examined interagency agreements between the Commission and EPA for the administration of EPA's Facility Planning Fund. We reviewed the history and status of construction project funding, schedules of anticipated and earned reimbursements, and various congressional hearing records and correspondence. To obtain an understanding of various budget and execution records, we interviewed the U.S. Section's key financial management officers, including the Chief Administrative Officer, the Chief of the Finance and Accounting Division, and the Budget Office Analyst. We inspected the records of all funds provided to the U.S. Section for fiscal years 1994-98, identifying direct appropriations from the Department of State and all other funding sources. We also analyzed the uses of those funds and reviewed fiscal year 1997 expenditures. To determine that funds owed to the U.S. Section from Mexico and other entities for construction and operations and maintenance costs were properly included and classified in the accounts and financial reports, we reviewed appropriation and funding data documents and project Minutes to identify arrangements for and amounts of payments the accounting system should reflect. We examined accounting system reports maintained by the U.S. Section's Finance and Accounting Division that included monthly trial balances, accounts receivable aging, and general ledger unbilled receivables. We also reviewed the Mexico receivables records maintained by the Foreign Affairs Office. We analyzed and scheduled construction and operations and maintenance receivable receipts for fiscal year 1994 through April 1998. To assess whether any corrective measures have been instituted, we reviewed earlier financial statement audits to identify and follow up on any condition of improper accountability of funds due to the U.S. Section. In cases of identified deficiencies in the accounting system processes, we discussed the results with the U.S. Section's Chief Administrative Officer and the Chief of the Financial Services Division to consider what needed to be done to correct the process. To determine that disbursements were exercised by personnel who had delegated authority and were separate from the obligation function, we selected 11 payments made in fiscal years 1997-98 to review for compliance with requirements. These payments were chosen because they were of an international nature requiring more sensitive scrutiny and were processed outside the unit that initiates contractor payments. We reviewed the transactions' documentation and steps followed to determine who initiated, who reviewed, and who approved the execution of these disbursements. We also documented and reviewed the certifications of delegated monetary authority and obligation authority for personnel associated with these payments. In cases of deficiencies in the process and to understand the consequences of not meeting the "Standards for Internal Controls in the Federal Government," we discussed the results with cognizant officials to consider what needed to be done to correct the process. To determine the extent to which previously identified oversight weaknesses have been addressed, we obtained and reviewed all available U.S. Section reports and management letters related to external audits conducted from 1992-95 and compiled a list of all deficiencies identified. For each deficiency, we interviewed cognizant U.S. Section officials and their staff members and reviewed U.S. Section policies and procedures to determine if corrective actions had been taken. To the extent that previously identified deficiencies had not been corrected, we obtained the rationale for not doing so and documented whether a plan for corrective action had been determined. To assess the adequacy of internal oversight, we interviewed the Compliance Officer and obtained and reviewed pertinent U.S. Section requirements for compliance reviews. We reviewed the U.S. Section's Internal Audit Directive, the current Compliance Officer's activities since joining the U.S. Section, reports and working papers related to completed audits, and the Compliance Officer's future audit plans. To evaluate the cost-sharing arrangements for joint projects with Mexico, we reviewed the Minutes associated with the five most recent negotiations and compared the agreed-upon terms with both Commission and Department of State documentation that demonstrated the level of involvement and when that involvement occurred. To determine how the terms provided to Mexico on two recent joint projects would affect costs, we performed a present value analysis of the repayment schedule. We also reviewed the appropriate Minutes to determine if there were other agreements reached that were not beneficial to the United States. To determine the adequacy of the U.S. Section's oversight of contract administration, we reviewed the contract administrator's performance on five recent contracts awarded by the U.S. Section. We identified the applicable regulations, policies, and procedures that govern U.S. Section contracting processes. We selected the five contracts based on their having been awarded in the 1990s, having exceeded $1 million in value, and having files and key personnel located at the U.S. Section in El Paso, Texas. We assessed the performance of the contract administrator on two operations and maintenance contracts to ensure that certified payments were supported by proper documentation. We also reviewed the contractor's performance by evaluating the extent to which the contractor corrected known deficiencies. To assess the adequacy of management oversight over U.S. Section activities, we obtained and reviewed policies and procedures associated with oversight of the U.S. Section. We interviewed cognizant officials of the Department of State, EPA, and state and local entities to identify requirements for oversight of the U.S. Section. We analyzed regulations, policies, and procedures provided by these organizations and compared the requirements to the level of oversight achieved. We performed our work between April and July 1998 in accordance with generally accepted government auditing standards. Elliott C. Smith Jeffrey A. Kans John E. Clary James B. Smoak Linda Kay Willard 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. 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Pursuant to a congressional request, GAO provided information on the U.S. Section of the International Boundary and Water Commission, focusing on: (1) the sources and uses of the U.S. Section's funds; (2) certain aspects of the U.S. Section's system of accounting and internal controls; (3) the cost-sharing arrangements for joint projects between the United States and Mexico; (4) the administration of U.S Section operations and maintenance contracts; and (5) the extent of oversight over the U.S. Section's programs and operations. GAO noted that: (1) the U.S. Section of the International Boundary and Water Commission has received total funding of approximately $217.9 million over the last 4 years; (2) the funds were from appropriations and grants or payments from other federal agencies and state and local governments; (3) it also received reimbursement from the Mexican government for costs incurred on joint projects; (4) the U.S. Section expended $46.7 million in fiscal year 1997, including $21.9 million from its appropriations and $24.8 million from grants and payments from others; (5) the funds were used for salaries and benefits, administrative costs, operation and maintenance of International Boundary and Water Commission projects, and construction activities; (6) the cost-sharing agreements between the United States and Mexico for two recently completed projects had payment terms that varied from those used on other joint developments; (7) for these two projects, the United States agreed to finance Mexico's share of costs due to Mexico's economic difficulties and in order to cover the cost of meeting environmental standards of the United States, which are higher than those in Mexico; (8) this resulted in $8.6 million worth of increased costs to the United States; (9) the total investment for those two projects--Nogales, Arizona, and South Bay, California--is $321.9 million; (10) there are weaknesses in certain aspects of the U.S. Section's finance and accounting systems; (11) regarding the administration of U.S Section operations and maintenance contracts, required monthly reports on contractor performance were not submitted; (12) oversight of the U.S. Section is minimal; (13) although the Department of State reviews the U.S. Section's budget submission and provides policy guidance to the U.S. Commissioner, the Section is not a constituent part of State and, therefore, the Department does not formally examine the Section's managerial activities because it operates administratively as an independent agency; (14) while the Environmental Protection Agency funds some projects along the southwest border, it only reviews U.S. Section contracts and monitors resulting construction projects where it is a major contributor; and (15) the U.S. Commissioner informed GAO in a July 1998 letter that actions have been taken or are in progress to correct the deficiencies discussed in this report.

Since the early 1990s, the explosion in computer interconnectivity, most notably growth in the use of the Internet, has revolutionized the way organizations conduct business, making communications faster and access to data easier. However, this widespread interconnectivity has increased the risks to computer systems and, more importantly, to the critical operations and infrastructures that these systems support, such as telecommunications, power distribution, national defense, and essential government services. Malicious attacks, in particular, are a growing concern. The National Security Agency has determined that foreign governments already have or are developing computer attack capabilities, and that potential adversaries are developing a body of knowledge about U.S. systems and methods to attack them. In addition, reported incidents have increased dramatically in recent years. Accordingly, there is a growing risk that terrorists or hostile foreign states could severely damage or disrupt national defense or vital public operations through computer-based attacks on the nation's critical infrastructures. Since 1997, in reports to the Congress, we have designated information security as a governmentwide high-risk area. Our most recent report in this regard, issued in January, noted that, while efforts to address the problem have gained momentum, federal assets and operations continued to be highly vulnerable to computer-based attacks. To develop a strategy to reduce such risks, in 1996, the President established a Commission on Critical Infrastructure Protection. In October 1997, the commission issued its report, stating that a comprehensive effort was needed, including "a system of surveillance, assessment, early warning, and response mechanisms to mitigate the potential for cyber threats." The report said that the Federal Bureau of Investigation (FBI) had already begun to develop warning and threat analysis capabilities and urged it to continue in these efforts. In addition, the report noted that the FBI could serve as the preliminary national warning center for infrastructure attacks and provide law enforcement, intelligence, and other information needed to ensure the highest quality analysis possible. In May 1998, PDD 63 was issued in response to the commission's report. The directive called for a range of actions intended to improve federal agency security programs, establish a partnership between the government and the private sector, and improve the nation's ability to detect and respond to serious computer-based attacks. The directive established a National Coordinator for Security, Infrastructure Protection, and Counter-Terrorism under the Assistant to the President for National Security Affairs. Further, the directive designated lead agencies to work with private-sector entities in each of eight industry sectors and five special functions. For example, the Department of the Treasury is responsible for working with the banking and finance sector, and the Department of Energy is responsible for working with the electric power industry. PDD 63 also authorized the FBI to expand its NIPC, which had been originally established in February 1998. The directive specifically assigned the NIPC, within the FBI, responsibility for providing comprehensive analyses on threats, vulnerabilities, and attacks; issuing timely warnings on threats and attacks; facilitating and coordinating the government's response to cyber incidents; providing law enforcement investigation and response; monitoring reconstitution of minimum required capabilities after an infrastructure attack; and promoting outreach and information sharing. PDD 63 assigns the NIPC responsibility for developing analytical capabilities to provide comprehensive information on changes in threat conditions and newly identified system vulnerabilities as well as timely warnings of potential and actual attacks. This responsibility requires obtaining and analyzing intelligence, law enforcement, and other information to identify patterns that may signal that an attack is underway or imminent. Since its establishment in 1998, the NIPC has issued a variety of analytical products, most of which have been tactical analyses pertaining to individual incidents. These analyses have included (1) situation reports related to law enforcement investigations, including denial-of-service attacks that affected numerous Internet-based entities, such as eBay and Yahoo and (2) analytical support of a counterintelligence investigation. In addition, the NIPC has issued a variety of publications, most of which were compilations of information previously reported by others with some NIPC analysis. Strategic analysis to determine the potential broader implications of individual incidents has been limited. Such analysis looks beyond one specific incident to consider a broader set of incidents or implications that may indicate a potential threat of national importance. Identifying such threats assists in proactively managing risk, including evaluating the risks associated with possible future incidents and effectively mitigating the impact of such incidents. Three factors have hindered the NIPC's ability to develop strategic analytical capabilities. First, there is no generally accepted methodology for analyzing strategic cyber-based threats. For example, there is no standard terminology, no standard set of factors to consider, and no established thresholds for determining the sophistication of attack techniques. According to officials in the intelligence and national security community, developing such a methodology would require an intense interagency effort and dedication of resources. Second, the NIPC has sustained prolonged leadership vacancies and does not have adequate staff expertise, in part because other federal agencies had not provided the originally anticipated number of detailees. For example, as of the close of our review in February, the position of Chief of the Analysis and Warning Section, which was to be filled by the Central Intelligence Agency, had been vacant for about half of the NIPC's 3-year existence. In addition, the NIPC had been operating with only 13 of the 24 analysts that NIPC officials estimate are needed to develop analytical capabilities. Third, the NIPC did not have industry-specific data on factors such as critical system components, known vulnerabilities, and interdependencies. Under PDD 63, such information is to be developed for each of eight industry segments by industry representatives and the designated federal lead agencies. However, at the close of our work in February, only three industry assessments had been partially completed, and none had been provided to the NIPC. To provide a warning capability, the NIPC established a Watch and Warning Unit that monitors the Internet and other media 24 hours a day to identify reports of computer-based attacks. As of February, the unit had issued 81 warnings and related products since 1998, many of which were posted on the NIPC's Internet web site. While some warnings were issued in time to avert damage, most of the warnings, especially those related to viruses, pertained to attacks underway. The NIPC's ability to issue warnings promptly is impeded because of (1) a lack of a comprehensive governmentwide or nationwide framework for promptly obtaining and analyzing information on imminent attacks, (2) a shortage of skilled staff, (3) the need to ensure that the NIPC does not raise undue alarm for insignificant incidents, and (4) the need to ensure that sensitive information is protected, especially when such information pertains to law enforcement investigations underway. However, I want to emphasize a more fundamental impediment. Specifically, evaluating the NIPC's progress in developing analysis and warning capabilities is difficult because the federal government's strategy and related plans for protecting the nation's critical infrastructures from computer-based attacks, including the NIPC's role, are still evolving. The entities involved in the government's critical infrastructure protection efforts do not share a common interpretation of the NIPC's roles and responsibilities. Further, the relationships between the NIPC, the FBI, and the National Coordinator for Security, Infrastructure Protection, and Counter-Terrorism at the National Security Council are unclear regarding who has direct authority for setting NIPC priorities and procedures and providing NIPC oversight. In addition, the NIPC's own plans for further developing its analytical and warning capabilities are fragmented and incomplete. As a result, there are no specific priorities, milestones, or program performance measures to guide NIPC actions or provide a basis for evaluating its progress. The administration is currently reviewing the federal strategy for critical infrastructure protection that was originally outlined in PDD 63, including provisions related to developing analytical and warning capabilities that are currently assigned to the NIPC. Most recently, on May 9, the White House issued a statement saying that it was working with federal agencies and private industry to prepare a new version of a "national plan for cyberspace security and critical infrastructure protection" and reviewing how the government is organized to deal with information security issues. Our report recommends that, as the administration proceeds, the Assistant to the President for National Security Affairs, in coordination with pertinent executive agencies, establish a capability for strategic analysis of computer-based threats, including developing related methodology, acquiring staff expertise, and obtaining infrastructure data; require development of a comprehensive data collection and analysis framework and ensure that national watch and warning operations for computer-based attacks are supported by sufficient staff and resources; and clearly define the role of the NIPC in relation to other government and private-sector entities. PDD 63 directed the NIPC to provide the principal means of facilitating and coordinating the federal government's response to computer-based incidents. In response, the NIPC has undertaken efforts in two major areas: providing coordination and technical support to FBI investigations and establishing crisis management capabilities. First, the NIPC has provided valuable coordination and technical support to FBI field offices, which have established special squads and teams and one regional task force in its field offices to address the growing number of computer crime cases. The NIPC has supported these investigative efforts by (1) coordinating investigations among FBI field offices, thereby bringing a national perspective to individual cases, (2) providing technical support in the form of analyses, expert assistance for interviews, and tools for analyzing and mitigating computer-based attacks, and (3) providing administrative support to NIPC field agents. For example, the NIPC produced over 250 written technical reports during 1999 and 2000, developed analytical tools to assist in investigating and mitigating computer-based attacks, and managed the procurement and installation of hardware and software tools for the NIPC field squads and teams. While these efforts have benefited investigative efforts, FBI and NIPC officials told us that increased computer capacity and data transmission capabilities would improve their ability to promptly analyze the extremely large amounts of data that are associated with some cases. In addition, FBI field offices are not yet providing the NIPC with the comprehensive information that NIPC officials say is needed to facilitate prompt identification and response to cyber incidents. According to field office officials, some information on unusual or suspicious computer-based activity has not been reported because it did not merit opening a case and was deemed to be insignificant. The NIPC has established new performance measures related to reporting to address this problem. Second, the NIPC has developed crisis management capabilities to support a multiagency response to the most serious incidents from the FBI's Washington, D.C., Strategic Information Operations Center. Since 1998, seven crisis action teams have been activated to address potentially serious incidents and events, such as the Melissa virus in 1999 and the days surrounding the transition to the year 2000, and related procedures have been formalized. In addition, the NIPC has coordinated development of an emergency law enforcement plan to guide the response of federal, state, and local entities. To help ensure an adequate response to the growing number of computer crimes, we are recommending that the Attorney General, the FBI Director, and the NIPC Director take steps to (1) ensure that the NIPC has access to needed computer and communications resources and (2) monitor implementation of new performance measures to ensure that field offices fully report information on potential computer crimes to the NIPC. Information sharing and coordination among private-sector and government organizations are essential to thoroughly understanding cyber threats and quickly identifying and mitigating attacks. However, as we testified in July 2000,establishing the trusted relationships and information-sharing protocols necessary to support such coordination can be difficult. NIPC efforts in this area have met with mixed success. For example, the InfraGard Program, which provides the FBI and the NIPC with a means of securely sharing information with individual companies, has gained participants. In January 2001, NIPC officials announced that 518 organizations had enrolled in the program, which NIPC officials view as an important element in building trust relationships with the private sector. However, of the four information sharing and analysis centers that had been established as focal points for infrastructure sectors, a two-way, information-sharing partnership with the NIPC had developed with only one--the electric power industry. The NIPC's dealings with two of the other three centers primarily consisted of providing information to the centers without receiving any in return, and no procedures had been developed for more interactive information sharing. The NIPC's information-sharing relationship with the fourth center was not covered by our review because the center was not established until mid-January 2001, shortly before the close of our work. Similarly, the NIPC and the FBI had made only limited progress in developing a database of the most important components of the nation's critical infrastructures--an effort referred to as the Key Asset Initiative. While FBI field offices had identified over 5,000 key assets, the entities that own or control the assets generally had not been involved in identifying them. As a result, the key assets recorded may not be the ones that infrastructure owners consider to be the most important. Further, the Key Asset Initiative was not being coordinated with other similar federal efforts at the Departments of Defense and Commerce. In addition, the NIPC and other government entities had not developed fully productive information-sharing and cooperative relationships. For example, federal agencies have not routinely reported incident information to the NIPC, at least in part because guidance provided by the federal Chief Information Officers Council, which is chaired by the Office of Management and Budget, directs agencies to report such information to the General Services Administration's Federal Computer Incident Response Capability. Further, NIPC and Defense officials agreed that their information-sharing procedures need improvement, noting that protocols for reciprocal exchanges of information had not been established. In addition, the expertise of the U.S. Secret Service regarding computer crime had not been integrated into NIPC efforts. The NIPC has been more successful in providing training on investigating computer crime to government entities, which is an effort that it considers an important component of its outreach efforts. From 1998 through 2000, the NIPC trained about 300 individuals from federal, state, local, and international entities other than the FBI. In addition, the NIPC has advised five foreign governments that are establishing centers similar to the NIPC.

To better protect the nation's critical computer-dependent infrastructures from computer-based attacks and disruption, the President issued a directive in 1998 that established the National Infrastructure Protection Center as a national focal point for gathering information on threats and facilitating the federal government's response to computer-based incidents. This testimony discusses the center's progress in (1) developing national capabilities for analyzing cyber threat and vulnerability data and issuing warnings, (2) enhancing its capabilities for responding to cyber attacks, and (3) developing outreach and information-sharing initiatives with government and private-sector entities. GAO found that although the center has taken some steps to develop analysis and warning capabilities, the strategic capabilities described in the presidential directive have not been achieved. By coordinating investigations and providing technical assistance the center has provided important support that has improved the Federal Bureau of Investigations' ability to investigate computer crimes. The center has also developed crisis management procedures and drafted an emergency law enforcement sector plan, which is now being reviewed by sector members. The center's information-sharing relationships are still evolving and will probably have limited effectiveness until reporting procedures and thresholds are defined and trust relationships are established. This testimony summarized an April 2001 report (GAO-01-323).

Retail payments are relatively high-volume, low-value payments. Retail payment methods include cash, checks, debit and credit card, and ACHtransactions. While depository institutions provide cash processing services to retailers and other depository institutions, the Federal Reserve provides cash processing services only to depository institutions and the U.S. government. The Federal Reserve and correspondent banks provide check collection and settlement services. The Federal Reserve and private electronic network operators provide clearance and settlement services for ACH transactions. Private electronic network operators also provide clearance and settlement services for debit card, credit card, and automated teller machine (ATM) transactions. For consumers and retailers, cash transactions are settled instantaneously. However, checks require a more complex settlement process and more time to settle. Depository institutions have several alternative methods for clearing and settling checks. Figure 1 illustrates an example of how a check is settled through direct presentment--when depositary banks present checks directly to the paying bank. In practice, local checks generally settle in 1 business day and nonlocal checks generally settle in 1 to 2 business days. Currently, checks are settled on business days, which do not include weekends, resulting in a delay in the settlement of those checks deposited during the latter part of the week. Credit card and debit card payments also require a complex system to clear and settle transactions. A credit transaction is initiated when a customer's card number is entered into a card reader, followed by the transaction amount. The data are transmitted to the card-issuing bank. The card-issuing bank accepts or denies the transaction. If the transaction is authorized, the customer signs to accept liability for the transaction. In the case of a debit card, the customer enters a personal identification number or sign the sales receipt to accept liability for the transaction. At the end of that day, the retailer submits the customer's transactions along with all of the other credit card transactions to its depository institution (retailer's bank), which credits the retailer usually in 1 to 2 business days. The credit card company is then responsible for creating the net settlement positions that result in the transfer of funds from the card-issuing bank to the retailer's bank. These transfers typically occur by Fedwire funds tranfers through a correspondent bank. The card-issuing bank would then bill the customer. When the customer pays the bill, the cycle is complete, as shown in figure 2. Debit card transactions are authorized and cleared in a similar fashion to credit cards, except that they settle by debiting customers' accounts and crediting retailers' accounts on the next business day. Depository institutions use a variety of channels to settle credit and debit card transactions, including accounts at a common correspondent, ACH networks, and Fedwire. Final settlement of ACH transfers processed by the Federal Reserve occurs through debits and credits to the accounts of depository institutions on the books of the Federal Reserve. ACH transfers that are processed only by private-sector ACH operators are net settled through the Federal Reserve. Float is created because of the time it takes to clear and settle payments, which affects retailers, consumers, and depository institutions. Float is generally defined as the lag between the receipt of a check or other payment and the settlement of that payment. This lag differs according to the method of payment. There is no float for cash. Checks are subject to the longest float, primarily due to the need to physically transport checks. Federal law and regulations prohibit depository institutions from paying interest on demand deposits consisting primarily of commercial checking accounts. Many depository institutions, however, offer "sweep" accounts to business customers as a mechanism by which these customers obtain interest earnings on account balances above negotiated account minimums. During the business week, the depository institution transfers, or "sweeps," commercial checking account balances above an agreed minimum into other accounts on which interest might be paid, such as MMDAs, or into interest-earning nondeposit financial instruments. Depository institutions typically invest these funds in short- term, low-risk assets, such as U.S. Treasury bills and notes, or money market mutual funds, among others. Depository institutions do not pay interest earnings on funds deposited on the weekend because they are unable to invest these funds until the next business day. Overall, U.S. settlement schedules are similar to settlement schedules in most G-10 countries. In some Asian countries, settlement services are available for a limited number of hours on Saturdays. Specifically, in Singapore and Hong Kong settlement occurs Saturday mornings, in addition to Monday through Friday services. Recently, South Korea ended its Saturday settlement hours because many commercial banks are closed on Saturdays. Appendix II further illustrates international payment systems' operating hours. Weekend settlement of financial transactions would provide small benefits for retailers and consumers, and little, if any, benefit for the economy as a whole. Retail industry representatives identified weekend interest earnings as the main potential benefit for retailers. However, our analysis of grocery industry data indicated that the grocery industry currently forgoes small potential interest income on its weekend sales relative to the grocery industry's annual sales or the national economy. If weekend settlement were adopted, retailers also could realize some secondary benefits such as reducing the amount of cash held in stores. However, other secondary benefits such as accelerated settlement represent benefit transfers primarily from consumers or banks to retailers, creating no economic stimulus to the economy. Although retail industry representatives identified weekend interest earnings as the main benefit for retailers, our analysis suggested that investing retailers' balances in sweep accounts and other investment vehicles over the weekend would provide minimal additional earnings to retailers and have virtually no impact relative to the economy as a whole. According to grocery industry publications, the industry had sales of $494 billion in year 2000, as seen in figure 3. Therefore, because depository institutions are unable to invest retailers' weekend cash deposits until Monday, we estimated, based on grocery industry data, that the grocery industry forgoes approximately $2.6 million each year in after-tax interest earnings, assuming a 2 percent interest rate, and $6.6 million a year, assuming an average 5 percent interest rate. The corresponding forgone after-tax interest earnings for check transactions are $2.8 million and $7 million annually, at 2 percent and 5 percent interest rates, respectively. Finally, for credit and debit cards, the forgone interest earnings are $2.5 million and $6.4 million, at 2 percent and 5 percent interest rates, respectively. Table 1 illustrates the estimates. Appendix III provides details of our estimates. Applying the same assumptions to the entire retail sector, which had sales of $3.4 trillion in the year 2000, we estimated that the annual forgone after-tax interest earnings for that sector would be $53.9 million at a 2 percent interest rate and $134 million at a 5 percent interest rate. However, these benefits might be reduced if depository institutions raised their fees, in a way that passed costs to retailers, to cover the increased costs associated with weekend operations. Weekend settlement could provide a number of secondary benefits to retailers and consumers. For example, retailers noted that weekend settlement would provide secondary benefits, such as reduced amounts of cash in stores, thereby reducing potential losses due to theft and lower insurance costs. The accelerated settlement of transactions would also benefit retailers by lowering accounts receivable balances, as noncash payments owed to retailers settle faster. Grocery officials stated that cash represents a large risk for store employees, and therefore, on a daily basis, grocers tend not to maintain large amounts of cash in stores. Excess sums generally are sent to depository institutions, usually via armored car services. Under the current system, depository institutions are not open to accept retailers' deposits on Saturday and Sunday evenings; therefore, deposits are generally maintained in store vaults or in bonded safes at the armored car services' facilities, which is a cost to retailers. Banking industry representatives stated that retailers currently must pay to insure large amounts of cash over the weekend. Finally, accelerated settlement of transactions could also benefit consumers if they are the recipients of check payments by making funds available sooner, assuming that the EFAA and the Federal Reserve Board's implementing regulations were amended to include weekends in the definition of "business day." The adoption of weekend settlement would transfer float income among retailers, consumers, and depository institutions rather than create new earnings. For example, retailers would earn interest income previously earned by check and debit card users, but no new interest income or wealth would be created. For credit cards, retailers potentially would obtain faster funds availability, but because card issuing depository institutions offer deferred payment to customers, retailers might earn additional interest income at the expense of depository institutions. For checks and debit cards, if retailers and consumers both had access to interest-bearing accounts or services provided by depository institutions, weekend settlement would move money more quickly out of customers' accounts and into retail sector accounts. On the other hand, retail industry representatives also stated that a disadvantage of weekend settlement would be that checks they had written would clear faster, thereby reducing interest currently earned on those funds. Faster funds availability from weekend settlement also could present drawbacks for consumers. Consumer advocates stated that consumers might face increased overdrafts if they did not adjust to the accelerated debiting of their checks. Weekend settlement would negatively affect those people who depend on check float to avoid account overdrafts. For example, consumers might write a check on a Friday afternoon for an amount greater than their account balance, knowing that on the following Monday their paycheck would be credited to the account and cover the amount of the check. Further, concerning the economy as a whole, the interest payments that retailers would receive from weekend settlement reflect transfers within the economy rather than the creation of income. For example, additional income that retailers might earn from weekend settlement of checks written or debit card transactions received from customers would be offset by corresponding losses of interest by check writers, debit card users, and depository institutions. Consumers with interest-bearing checking accounts would lose the interest they would have earned on checks written on Friday evenings and Saturdays. If checks were drawn on noninterest-bearing accounts, then depository institutions would lose funds on which they were not paying interest. Corporate treasurers of retail businesses noted that although they potentially could accumulate interest earnings if weekend settlement were adopted and interest-earning accounts were available, depository institutions might pass along some or all of the costs of operating on weekends to retailers and consumers in the form of higher fees, thus lessening the gains to retailers. Depository institutions stated that to pay interest, they would need to have access to short-term investment markets on weekends. Our analysis showed that weekend settlement would be unlikely to provide any stimulus to economic growth. Its only impact would be to make funds available on weekends that would otherwise be available on Monday. Because payment system actors and processes are interdependent, weekend settlement would require payment service providers that clear and settle retail and wholesale payments to open on weekends, resulting in increased capital and operational costs. The greatest concern that payment service providers expressed to us was the cost of additional computer system and staffing resources needed to mitigate the increased risk of operational failures that weekend settlement would present. Although they could not provide exact cost figures for the additional resources they would need, payment service providers stated that costs would be significant and potentially prohibitive for small depository institutions. According to payment service providers, these operational costs would exceed any potential benefits that weekend settlement could create, and likely would reduce productivity in the payment system. Moreover, they stated that alternatives to weekend settlement with lower operational costs currently exist, and that efforts in other areas are under way to increase payment system efficiency. Because the payment system consists of interdependent processes and relationships among payment system actors, weekend settlement would require many payment service providers to open on weekends. For example, private and Federal Reserve cash and check processing centers and check transportation networks would have to be fully operational on weekends so that cash and check transactions could be cleared.However, banking industry representatives pointed out that not all depository institutions' branches would need to open. National and regional clearing organizations also would need to open so that transactions among depository institutions could be cleared, netted, and settled. According to depository institution officials we spoke with, both Federal Reserve and private ACH networks would have to open on weekends to facilitate settlement of check and debit card transactions. Similarly, private electronic network providers told us that Fedwire would need to open on weekends to facilitate final settlement of credit card transactions. In addition, depository institutions also stated that once retailers' transactions are settled and their accounts are credited for weekend deposits, they would need government securities and money markets to open on weekends to invest these deposits and pay interest on excess sweep account balances. Federal Reserve and investment market officials told us that Fedwire and clearing organizations for investment markets also would need to open to clear and settle these transactions. Payment service providers we met with generally viewed weekend downtime for computer systems as critical to the smooth provision of clearance and settlement services during the business week. Payment service providers stated that most computer systems are used to test, upgrade, and maintain computer-system activities on weekends when production activities are limited. These ongoing weekend activities reduce the potential for operational failures during the business week. Business continuity testing of computer systems remains a high priority for financial markets after the terrorist attacks of September 11, 2001. These tests generally take place on weekends and sometimes take more than 1 day to complete. Depository institution and clearing organization officials also said that weekend downtime is important for resolving problems that occur when implementing new software applications or upgrades to existing applications. Like other payment service providers, Federal Reserve officials told us that the Federal Reserve uses weekends to maintain and test its payment service applications and its internal accounting system that are used to settle payments. Most payment service providers told us that because tests, upgrades, and maintenance would have to continue if weekend settlement were adopted, they would need additional computer hardware and software to simultaneously perform weekend settlement and regular weekend activities, thereby increasing capital costs. One private electronic payment network that moved from a 5 day production schedule to a 7 day production schedule for transaction processing characterized its costs as substantial. The network had to purchase additional hardware to double computer system capacity so that it could maintain complete redundancy in production, contingency, and testing activities 7 days a week. Representatives for the network said that their case could be an example of the potential hardware resources that other payment service providers could face if weekend settlement were adopted. Officials at a large depository institution and investment market representatives pointed out that payment service providers would have to modify each line of relevant software code to reflect Saturdays and Sundays as valid settlement dates. The depository institution officials said that their retail banking operations would require code changes for the institution's 80 software applications--with estimated costs in the millions of dollars. Clearing organizations also identified the need for additional software to carry out settlement on weekends and estimated that software costs would exceed potential hardware costs. Additional staff needed to carry out weekend settlement also would increase operational costs for payment service providers. Some payment service providers estimated that staffing costs for weekend settlement could increase current operating budgets by up to 40 percent. For instance, depository institutions would require additional staff in departments that currently are not open on weekends, such as staff to handle check presentments and return checks and staff to manage their general ledgers and Federal Reserve accounts. Banking industry representatives noted that small depository institutions that perform their own clearing and processing activities would need to hire additional staff to prepare cash and checks for weekend shipment to local Federal Reserve Banks and branches. This could be particularly costly for small depository institutions because "back-office" staffs often consist of one person. Similarly, Federal Reserve officials said that additional staff would be needed for check processing, ACH, Fedwire, internal accounting, credit and risk management, and information technology operations, as well as other support functions. Investment market representatives commented that the human capital costs of weekend operations would be high because firms likely would have to pay senior staff at premium rates to work on weekends. Investment market representatives said that operating on weekends would decrease market efficiency and that they generally expected that weekend markets would be inefficient and illiquid because weekend trading activity likely would be low. Investment market representatives pointed out that liquidity in weekend markets would be generated only if there were sufficient numbers of investment firms interested in obtaining retailers' excess sweep account balances. They noted that investment firms have many other options for short-term investment beyond government securities and money market instruments--typical investment vehicles used by depository institutions for sweep account funds. For these reasons, they noted that they sometimes recommend closing markets early before holidays, such as Good Friday, if trading volumes are low, to preserve market efficiency and create greater liquidity. In general, they did not expect weekend investment market liquidity to offset the potential operating costs. Similarly, depository institution officials and clearing organizations anticipated that weekend settlement would result in the spreading out current 5-day transaction volume over 7 days of operations, thereby decreasing system efficiency. Two proposed variations of 7 day settlement are currently viewed as not practical and too costly. The first variation involves a 6 day settlement schedule, where settlement would occur Monday through Saturday. Payment service providers told us that a 6 day settlement schedule would present lower operational risk and costs relative to a 7 day settlement schedule, but currently would be complicated and too expensive. Some payment providers noted that once technology more generally allows faster computer processing, 6-day settlement could be possible because it would provide 1 day during which computer system maintenance could be performed. The second variation relates to selective processing of transactions by payment method--for example, weekend processing of cash or check transactions. However, according to banking industry representatives, processing and settlement by payment method would be impractical because depository institutions' demand deposit accounting systems, which debit and credit customer accounts, do not differentiate transactions by payment methods. Rather, representatives from depository institutions stated that large batches of transactions are queued for debiting from and crediting to customer accounts regardless of the payment method associated with the transaction. Federal Reserve officials also said that selective settlement also would require the supporting settlement infrastructure to open on weekends, such as Fedwire funds transfer and securities transfer services. Therefore, such an approach would not lower operational costs of settling transactions on weekends. We identified current banking services that provide business customers with some of the advantages of weekend settlement but do not require payment service providers to incur costs of weekend operations. For example, officials at a large depository institution said that one of its large business customers requested a service whereby, on Mondays, the depository institution provides backdated interest on funds that the customer deposits on Mondays, as if the funds had been deposited and credited to the customer's account over the weekend. Officials from the depository institution noted that this service is no different than other services in that it is provided to the customer for a fee. Banking industry representatives told us that some depository institutions offer "fully analyzed" accounts, whereby they calculate the average daily account balances of commercial customers and determine daily interest earnings credit based on those figures. They noted that fully analyzed accounts allow account fees and charges to be offset by earnings credit based on the average daily collected account balance. Depository institution officials and banking industry representatives said that these services are offered within the context of existing relationships with commercial customers. They generally viewed these services as alternative methods of providing weekend interest earnings for business customers that do not require other payment service providers to be in operation on weekends. According to Federal Reserve and clearing organization officials, ongoing efforts to increase payment system efficiency relate to extending Fedwire's hours of operation during the business week to correspond with activity in Asian markets. Although extending Fedwire's hours of operation would not provide retailers with weekend interest earnings, it could increase efficiency in the payment system by allowing firms to consolidate risk management resources. Payment service providers generally expected that in the short term, increased efficiency in the payment system would come from converting traditionally paper-based payment methods into electronic form. Some payment service providers said that check truncation--the conversion of a paper check into an electronic equivalent that is transmitted in place of the original check-- would eliminate the float that transporting checks creates in the check collection process. Officials at one clearing organization said that weekend settlement costs could be lowered if there were an increase in electronic payment instruments and a corresponding decline in paper- based payment instruments within the payment system. Our legal research found no federal law that would specifically prohibit banks, clearing organizations, or other entities from engaging in weekend settlement operations. Some states, however, have laws prohibiting banks from doing business on Sundays or state holidays. OCC has determined that state bank closure laws do not apply to national banks. National banks, therefore, would not be prohibited from engaging in weekend settlement operations. However, in states prohibiting banks from operating on certain days, state-chartered banks would be precluded from conducting such operations on those days unless the closure laws were preempted. The federal financial institution regulators do not specifically regulate the hours of operation of state-chartered institutions, so state closure laws generally have not been preempted with respect to such institutions. We express no opinion regarding the extent to which the Federal Reserve, pursuant to its authority over the payment system, could preempt state closure laws in order to provide for weekend settlement services. It appears that Congress could choose to preempt such laws through legislation. Because they have not been preempted, state closure laws applicable to state banks could interfere with the development of a uniform national weekend settlements system. Our research indicates, however, that a relatively small number of states have Sunday closure laws. In addition to state closure laws, development of a weekend settlement system involves other legal considerations. For example, under the EFAA and the Federal Reserve's Regulation CC, deposited funds must be made available and checks must be returned within time periods based on "business days" and "banking days." The term "business day" is defined as a calendar day other than a legal holiday, Saturday, or Sunday; a "banking day" is a business day on which a bank office conducts substantially all of its banking operations. Even if banks were to conduct settlement operations over the weekend, such operations would not necessarily result in corresponding funds availability and check returns because weekends are not counted as business days. Moreover, the settlement process could be complicated by a lack of uniformity and predictability in bank operations that might exist if banks were to conduct their clearing and settlement operations using different timetables. Other legal considerations include the impact of wage and hour laws and matters of safety and soundness. To the extent bank employees involved in settlement operations are subject to federal and state wage and hour laws, institutions would have to ensure that weekend operations did not run afoul of provisions requiring, among other things, the payment of overtime for work in excess of 40 hours per week. Concerning safety and soundness issues, banks would have to ensure that utilizing computer systems and other resources on weekends would not compromise their ability to maintain and update financial and security systems. We received technical comments and corrections on a draft of this report from Treasury and the Federal Reserve that we incorporated, as appropriate. In addition, the Federal Reserve provided written comments in which it agreed that the potential costs of weekend settlement would outweigh the associated benefits. These comments are reprinted in appendix IV. As agreed with your office, we plan no further distribution of this report until 30 days from its issue date unless you publicly release its contents sooner. We will then send copies of this report to the Chairman of the Committee on Financial Services, House of Representatives; the Ranking Minority Member of the Committee on Financial Services, House of Representatives; the Ranking Minority Member of the Subcommittee on Financial Institutions and Consumer Credit, House of Representatives; the Secretary of the Department of the Treasury; and the Chairman of the Board of Governors of the Federal Reserve System. We will make copies available to others on request. In addition, this report is also available on GAO's Web site at no charge at http://www.gao.gov. Please contact me or Barbara Keller, Assistant Director, at (202) 512-8678 if you or your staff have any questions concerning this letter. To determine the potential benefits of weekend settlement, we interviewed and requested data from consumers groups, retail representatives, and payment service providers. We focused our study on the clearance and settlement of retail payments made by cash (which requires no clearing and settles instantaneously), checks, debit, and credit cards. We spoke with consumer advocacy groups to obtain the consumer perspective, and we interviewed representatives from industries within the retail sector, including grocery industry and home improvement industry representatives. We focused on the grocery industry because the majority of sales take place on weekends and primarily involve cash, check, and debit card transactions. To estimate the forgone interest earnings of the grocery industry, we obtained studies from third-party sources, some of which were conducted by industry participants. We have not assessed the quality of the research methodologies used in these studies. We used calendar year 2000 grocery industry sales data from the Progressive Grocer (PG), an industry publication. This was the latest year for which complete information was available. We also obtained grocery industry sales data from the U.S. Census Bureau for comparison purposes. We used the results of a payments study, performed by a large electronic network provider, that tracked the purchasing behavior of 20,000 consumers to determine what percentage of grocery sales are made with cash, check, and debit cards, respectively. We also used the results of a consumer survey on when consumers shop during the week, published in the Progressive Grocer 2001 Annual Report and short-term interest rate data from the Board of Governors of the Federal Reserve System. Appendix III provides details on our calculation of the forgone interest earnings. We spoke with payment system providers to gain their perspectives on the potential costs and operational issues involving weekend settlement. We interviewed officials from several depository institutions, banking and bond market industry representatives, clearing organizations, and private electronic payment network operators. We interviewed officials from various components of the Federal Reserve involved in the provision of payment system services including cash and check processing, check transportation, ACH services, wholesale payments services, and open market operations. We also spoke with senior staff from the Department of the Treasury about the potential implications of weekend settlement on the Treasury securities market. We obtained information from corporate treasury representatives on the perceived advantages and disadvantages of weekend settlement. Finally, to analyze and compare U.S. settlement schedules, we obtained information from representatives of central banks in selected foreign countries on the operating schedules of their respective settlement systems. We also obtained information from central banks' Web sites. We focused our analysis of international settlement schedules on countries with relatively modern, industrialized economies in selected geographic areas--specifically, Asia, Europe, North America, Australia, and New Zealand, as depicted in appendix II. We based our analysis of potential legal considerations involving weekend settlement on research of relevant federal and state statutes, regulations, judicial decisions, and other legal databases, and conducted interviews with banking agency attorneys and representatives of payment system providers. We conducted our work in Washington, D.C., Atlanta, Georgia, and New York, New York, between February and September 2002 in accordance with generally accepted government auditing standards. Wholesale System Fedwire CHIPS Bank of Japan - Network (BOJ - NET) Large Value Transfer System (LVTS) Trans-European Automated Real-time Gross settlement Express Transfer (TARGET) Society for Worldwide Interbank Financial Telecommunications - Payment Delivery System (SWIFT - PDS) Exchange Settlement Account System (ESAS) Mon - Fri Sat Mon - Fri Sat Mon - Fri 9:00 am -7:00 pm (GMT +12) 8:00 pm -8:40 am (+1 day) Closed 12:01 am Sat - 11:59 pm Sun 9:00 am - 5:30 pm (GMT +8) 9:00 am - 12:00 pm 9:00 am - 6:30 pm (GMT +8) 9:00 am - 2:45 pm 9:30 am - 4:30 pm (GMT +9) All countries have real-time gross settlement systems except Canada, which has a net-settlement system. The following European Union countries participate in TARGET: Austria, Belgium, Finland, France, Germany, Ireland, Italy, Luxembourg, The Netherlands, Portugal, and Spain. Grocery industry representatives said that because the settlement system is not open on weekends, retailers are losing money because the funds they receive on Friday evening, Saturday, and Sunday cannot be credited to their accounts and earn interest before Monday, at the earliest. These calculations estimate the amount of interest forgone to the grocery industry for retail transactions made by cash, checks, and credit and debit cards. This calculation measures the upper bound of forgone earnings. It assumes that every store would deposit every dollar and every check at the bank on the day that it is received. It also does not take into account that payments made by retailers, under weekend settlement, would be debited from their accounts earlier, thereby potentially decreasing their interest earnings. To measure forgone interest earnings, we used the federal funds rate, the rate at which a bank with excess reserves at a Federal Reserve district bank charges other banks that need overnight funds. This is an appropriate measure because the excess grocery funds would be invested in a similar, short-term fashion. The average federal funds rate from January 1, 1998, to January 1, 2002, was approximately 5 percent. The current federal funds rate is approximately 2 percent. We estimated forgone earnings at both of these rates. To gain credit for deposits for a given day, retailers must have deposits collected by approximately 2:00 p.m. on that day. Grocery industry representatives stated that most Friday sales tend to occur after that hour; therefore, we assumed that all proceeds from Friday, Saturday, and Sunday do not get deposited until Monday. However, Sunday proceeds deposited on Monday generally would be processed as quickly as money deposited Monday through Thursday; therefore, we did not include Sunday proceeds as idle balances. In addition to those named above, Tonita W. Gillich, Marc Molino, Robert Pollard, Carl Ramirez, Barbara Roesmann, Nicholas Satriano, Paul Thompson, and John Treanor made key contributions to this report. U.S. General Accounting Office, Payment Systems: Central Bank Roles Vary, but Goals Are the Same, GAO-02-303 (Washington, D.C.: (February 25, 2002). U.S. General Accounting Office, Check Relay: Controls in Place Comply With Federal Reserve Guidelines, GAO-02-19 (Washington, D.C.: December 12, 2001). U.S. General Accounting Office, Federal Reserve System: Mandated Report on Potential Conflicts of Interest, GAO-01-160 (Washington, D.C.: November 13, 2000). U.S. General Accounting Office, Retail Payments Issues: Experience With Electronic Check Presentment, GAO/GGD-98-145 (Washington, D.C.: July 14, 1998). U.S. General Accounting Office, Payments, Clearance, and Settlement: A Guide to the Systems, Risks, and Issues, GAO/GGD-97-73 (Washington, D.C.: June 20, 1997).

The U.S. payment system is a large and complex system of people, institutions, rules, and technologies that transfer monetary value and related information. The nation's payment system transfers an estimated $3 trillion dollars each day--nearly one third of the U.S. gross domestic product. Currently, settlement--the final step in the transfer of ownership involving the physical exchange of payment or securities--occurs only during the business week. Some retailers, however, generate approximately half their weekly sales on weekends--when depository and other financial institutions generally are closed--receiving cash, checks, and electronic payments that are not credited to their accounts until at least the next business day. Weekend settlement of financial transactions would provide small benefits to retailers and consumers, and little, if any, benefit to the economy as a whole. Because payment system actors and processes are interdependent, implementing weekend settlement would require payment service providers that clear and settle retail and wholesale payments to open on weekends, resulting in significantly increased operational costs. Although there are no direct federal prohibitions against weekend settlement, state laws that are not preempted by federal laws or regulations providing for weekend settlement could interfere with development of a uniform, national 7 day settlement system.

In an effort to increase homeland security following the September 11, 2001, terrorist attacks on the United States, President Bush issued the National Strategy for Homeland Security in July 2002 and signed legislation creating DHS in November 2002. The strategy set forth the overall objectives, mission areas, and initiatives to prevent terrorist attacks within the United States, reduce America's vulnerability to terrorism, and minimize the damage and assist in the recovery from attacks that may occur. The strategy also called for the creation of DHS. The department, which began operations in March 2003, represented a fusion of 22 federal agencies to coordinate and centralize the leadership of many homeland security activities under a single department. Although the National Strategy for Homeland Security indicated that many federal departments (and other nonfederal stakeholders) will be involved in homeland security activities, DHS has the dominant role in implementing the strategy. The strategy identified six mission areas and 43 initiatives. DHS was designated the lead federal agency for 37 of the 43 initiatives. In addition, DHS had activities underway in 40 of the 43 initiatives. In addition, DHS has the dominant share of homeland security funding. Figure 1 shows the proposed fiscal year 2006 homeland security funding for federal departments and agencies, with DHS constituting about 55 percent of the total. The November 2002 enactment of legislation creating DHS represented a historic moment of almost unprecedented action by the federal government to fundamentally transform how the nation protects itself from terrorism. Rarely in the country's past had such a large and complex reorganization of government occurred or been developed with such a singular and urgent purpose. This represented a unique opportunity to transform a disparate group of agencies with multiple missions, values, and cultures into a strong and effective cabinet department whose goals are to, among other things, protect U.S. borders, improve intelligence and information sharing, and prevent and respond to potential terrorist attacks. Together with this unique opportunity, however, came a significant risk to the nation that could occur if the department's implementation and transformation was not successful. GAO designated DHS's transformation as high-risk in January 2003based on three factors. First, DHS faced enormous challenges in implementing an effective transformation process, developing partnerships, and building management capacity because it had to effectively combine 22 agencies with an estimated 170,000 employees specializing in various disciplines-- including law enforcement, border security, biological research, computer security, and disaster mitigation--into one department. Second, DHS faced a broad array of operational and management challenges that it inherited from its component legacy agencies. In fact, many of the major components that were merged into the new department, including the Immigration and Naturalization Service, the Transportation Security Administration, Customs Service, Federal Emergency Management Agency, and the Coast Guard, brought with them at least one major problem such as strategic human capital risks, information technology management challenges, or financial management vulnerabilities, as well as an array of program operations challenges and risks. Finally, DHS's national security mission was of such importance that the failure to effectively address its management challenges and program risks could have serious consequences on our intergovernmental system, our citizen's health and safety, and our economy. Overall, our designation of DHS's transformation as a high-risk area and its inclusion on the 2003 High-Risk List was due to the failure to transform the diverse units into a single, efficient, and effective organization would have dire consequences for our nation. Since our 2003 designation of DHS's transformation as high-risk, DHS leadership has provided a foundation for maintaining critical operations while undergoing transformation. DHS has worked to protect the homeland and secure transportation and borders, funded emergency preparedness improvements and emerging technologies, assisted law enforcement activities against suspected terrorists, and issued its first strategic plan. According to DHS's performance and accountability report for fiscal year 2004 and updated information provided by DHS officials, the department has accomplished the following activities as part of its integration efforts: reduced the number of financial management service centers from 19 to 8, consolidated acquisition support for 22 legacy agencies within 8 major procurement programs, consolidated 22 different human resources offices to 7, and consolidated bank card programs from 27 to 3. As described in the next section, despite real and hard-earned progress, DHS still has significant challenges to overcome in all of its management areas. It is because of these continuing challenges that we continue to designate the implementation and transformation of DHS as high-risk. DHS faces a number of management challenges to improving its ability to carry out its homeland security missions. Among these challenges, which are discussed in more detail in the following sections, are providing focus for management efforts, monitoring transformation and integration, improving strategic planning, managing human capital, strengthening financial management infrastructure, establishing an information technology management framework, managing acquisitions, and coordinating research and development. One challenge that DHS faces is to provide focus on management efforts. The experience of successful transformations and change management initiatives in large public and private organizations suggests that it can take 5 to 7 years until such initiatives are fully implemented and cultures are transformed in a substantial manner. Because this timeframe can easily outlast the tenures of managers, high-performing organizations recognize that they need to have mechanisms to reinforce accountability for organization goals during times of leadership transition. Focus on management efforts needs to be provided at two levels of leadership. The first level is that of the political appointees in top leadership positions. These leaders are responsible for both mission and management support functions. Although DHS has been operating about 2 years, it has had two Secretaries, three Deputy Secretaries, and additional turnover at the Undersecretary and Assistant Secretary levels. The problem of turnover in top leadership is not unique to DHS. The average tenure of political leadership in federal agencies--slightly less than 3 years for the period 1990-2001--and the long-term nature of change management initiatives can have critical implications for the success of those initiatives. The frequent turnover of the political leadership has often made it difficult to obtain the sustained and inspired attention required to make needed changes. Similarly, the recent turnover in DHS's top leadership raises questions about the department's ability to provide the consistent and sustained senior leadership necessary to achieve integration over the long term. Another level for focus on management efforts is those leaders responsible for day-to-day management functions. As we have reported, a Chief Operating Officer (COO)/Chief Management Officer (CMO) may effectively provide the continuing, focused attention essential to successfully completing these multiyear transformations in agencies like DHS. At DHS, we have reported that the COO/CMO concept would provide the department with a single organizational focus for the key management functions involved in the business transformation of the department, such as human capital, financial management, information technology, acquisition management, and performance management, as well as for other organizational transformation initiatives. We have also recently testified that a COO/CMO can effectively provide the continuing, focused attention essential to successfully complete the implementation of DHS's new human capital system, a large-scale, multiyear change initiative. The specific implementation of a COO/CMO position must be determined within the context of the particular facts, circumstances, challenges and opportunities of each individual agency. As the agency is currently structured, the roles and responsibilities of the Under Secretary for Management contain some of the characteristics of a COO/CMO for the department. According to Section 701 of the Homeland Security Act, the Under Secretary for Management is responsible for the management and administration of the Department in such functional areas as budget, accounting, finance, procurement, human resources and personnel, information technology, and communications systems. In addition, the Under Secretary is responsible for the transition and reorganization process and to ensure an efficient and orderly transfer of functions and personnel to the Department, including the development of a transition plan. While the protection of the homeland is the primary mission of the department, critical to meeting this challenge is the integration of DHS's varied management processes, systems, and people--in areas such as information technology, financial management, procurement, and human capital--as well as in its administrative services. The integration of these various functions is being executed through DHS's management integration initiative. The success of this initiative is important since the initiative provides critical support for the total integration of the department, including its operations and programs, to ultimately meet its mission of protecting the homeland. Last week, we released a report on DHS's management integration efforts to date as compared against selected key practices consistently found to be at the center of successful mergers and transformations. Overall, we found that while DHS has made some progress in its management integration efforts, it has the opportunity to better leverage this progress by implementing a comprehensive and sustained approach to its overall integration efforts. First, key practices show that establishing implementation goals and a timeline is critical to ensuring success and could be contained in an overall integration plan for a merger or transformation. DHS has issued guidance and plans to assist its integration efforts, on a function-by-function basis (information technology and human capital, for example); but it does not have such a comprehensive strategy to guide the management integration departmentwide. Specifically, DHS still does not have a plan that clearly identifies the critical links that must occur across these functions, the necessary timing to make these links occur, how these critical interrelationships will occur, and who will drive and manage them. Second, it is important to dedicate a strong and stable implementation team for the day-to-day management of the transformation, a team vested with the necessary authority and resources to help set priorities, make timely decisions, and move quickly to implement decisions. In addition, this team would ensure that various change initiatives are sequenced and implemented in a coherent and integrated way. DHS is establishing a Business Transformation Office, reporting to the Under Secretary for Management, to help monitor and look for interdependencies among the individual functional integration efforts. However, this office is not currently responsible for leading and managing the coordination and integration that must occur across functions not only to make these individual initiatives work but also to achieve and sustain the overall management integration of DHS. To address this challenge, we recommended, and DHS agreed, that it should develop an overarching management integration strategy and provide it's recently established Business Transformation Office with the authority and responsibility to serve as a dedicated integration team and also help develop and implement the strategy. Effective strategic planning is another challenge for DHS. We have previously identified strategic planning as one of the critical success factors for new organizations. This is particularly true for DHS, given the breadth of its responsibility and need to clearly identify how stakeholders' responsibilities and activities align to address homeland security efforts. Without thoughtful and transparent planning that involves key stakeholders, DHS may not be able to implement its programs effectively. In 2004, DHS issued its first departmentwide strategic plan. We have evaluated DHS's strategic planning process, including the development of its first departmentwide strategic plan, and plan to release a report on our findings within a few weeks. This report will discuss (1) the extent to which DHS's planning process and associated documents address the required elements of the Government Performance and Results Act of 1993 (GPRA) and reflect good strategic planning practices and (2) the extent to which DHS's planning documents reflect both its homeland security and nonhomeland security mission responsibilities. Another management challenge faced by DHS is how to manage its human capital. Our work in identifying key practices for implementing successful mergers and transformations indicates that attention to strategic human capital management issues should be at the center of such efforts. DHS has been given significant authority to design a new human capital system free from many of the government's existing civil service requirements, and has issued final regulations for this new system. We have issued a series of reports on DHS's efforts to design its human capital system. First, we found that the department's efforts to design a new human capital system was collaborative and facilitated the participation of employees from all levels of the department, and generally reflected important elements of effective transformations. We recommended that the department maximize opportunities for employees' involvement throughout the design process and that it place special emphasis on seeking the feedback and buy-in of front line employees in the field. Second, we found that DHS's human capital management system, as described in the recently released final regulations, includes many principles that are consistent with proven approaches to strategic human capital management. For example, many elements for a modern compensation system---such as occupational cluster, pay bands, and pay ranges that take into account factors such as labor market conditions--- are to be incorporated into DHS's new system. However, these final regulations are intended to provide an outline and not a detailed, comprehensive presentation of how the new system will be implemented. Thus, DHS has considerable work ahead to define the details of the implementation of its system, and understanding these details is important to assessing the overall system. DHS faces significant financial management challenges. Specifically, it must address numerous internal control weaknesses, meet the mandates of the DHS Financial Accountability Act, and integrate and modernize its financial management systems, which individually have problems and collectively are not compatible with one another. Overcoming each of these challenges will assist DHS in strengthening its financial management environment, improving the quality of financial information available to manage the department day to day, and obtaining an unqualified opinion on its financial statements. DHS's independent auditors were unable to issue an opinion on any of the department's financial statements for fiscal year 2004. This was a substantial setback in DHS's financial management progress, compounded by continued challenges in resolving its internal control weaknesses. The number of material internal control weaknesses at the department has increased from 7 as of September 30, 2003 to 10 as of September 30, 2004. With the passage of the Department of Homeland Security Financial Accountability Act (the Accountability Act), DHS is now subject to the Chief Financial Officers Act of 1990 (the CFO Act) and the Federal Financial Management Improvement Act of 1996 (FFMIA). The Accountability Act also requires that in fiscal year 2005 the Secretary of Homeland Security include an assertion on internal controls over financial reporting at the department, and in fiscal year 2006 requires an audit of internal controls over financial reporting. We will continue to monitor the steps DHS is taking to meet the requirements of the Accountability Act as part of our audit of the consolidated financial statements of the United States government. We reported in July 2004 that DHS continues to work to reduce the number of financial management service providers and to acquire and deploy an integrated financial enterprise solution. At that time, DHS reported that it had reduced the number of financial management service providers for the department from the 19 providers at the time DHS was formed to 10. DHS planned to consolidate to 7 providers. Additionally, DHS hired a contractor to deploy an integrated financial enterprise solution. This is a costly and time consuming project and we have found that similar projects have proven challenging for other federal agencies. We will therefore continue to monitor DHS's progress on overcoming this serious challenge. DHS has recognized the need for a strategic management framework that addresses key information technology disciplines, and has made a significant effort to make improvements in each of these disciplines. For example, DHS is implementing its information technology (IT) investment management structure, developing an enterprise architecture, and has begun IT strategic human capital planning. However, much remains to be accomplished before it will have fully established a departmentwide IT management framework. To fully develop and institutionalize the management framework, DHS will need to strengthen strategic planning, develop the enterprise architecture, improve management of systems development and acquisition, and strengthen security. To assist DHS, we have made numerous recommendations, including (1) limiting information technology investments until the department's strategic management framework is completed and available to effectively guide and constrain the billions of dollars that DHS is spending on such investments; (2) taking appropriate steps to correct any limitations in the Chief Information Officer's ability to effectively support departmentwide missions; and (3) ensuring the department develops and implements a well-defined enterprise architecture to guide and constrain business transformation and supporting system modernization. The development of this framework is essential to ensuring the proper acquisition and management of key DHS programs such as U.S. Visitor and Immigrant Status Indicator Technology (US-VISIT), Automated Commercial Environment, and Secure Flight. To this end, we have recently reported on key management challenges and weaknesses for each of the programs that an effective DHS-wide framework for managing systems investments would be instrumental in addressing. Our work has indicated that managing acquisitions is also a major management challenge for DHS. The department faces the challenge of structuring its acquisition organization so that its various procurement organizations are held accountable for complying with procurement policies and regulations and ensuring that taxpayer dollars are well-spent. In addition, the department has in place a number of large, complex, and high-cost acquisition programs, such as US-VISIT and the Coast Guard's Deepwater program, which will need to be closely managed to ensure that they receive the appropriate level of oversight and that acquisition decisions are made based on the right level of information. For example, we reported in March 2004 that the Deepwater program needed to pay more attention to management and contractor oversight in order to avoid cost overruns. We have also reported on contract management problems at the former Immigration and Naturalization Service, now a part of DHS, and TSA. We will issue a report at the end of the this month that addresses (1) areas where DHS has been successful in promoting collaboration among its various organizations, (2) areas where DHS still faces challenges in integrating the acquisition function, and (3) the department's progress in implementing an effective review process for its major, complex investments. DHS also faces management challenges in coordinating research and development (R&D). Our work has recently found that DHS has not yet completed a strategic plan to identify priorities, goals, objectives, and policies for the R&D of homeland security technologies and that additional challenges remain in its coordination with other federal agencies. Failure to complete a strategic plan and to fully coordinate its research efforts may limit DHS's ability to leverage resources and could increase the potential for duplication of research. In addition, DHS faces challenges with regard to its use of DOE laboratories. These challenges include the development of a better working relationship through better communication and the development of clear, well-defined criteria for designating the DOE laboratories to receive the majority of DHS's R&D funding. Moreover, DHS faces the challenge of balancing the immediate needs of the users of homeland security technologies with the need to conduct R&D on advanced technologies for the future. Similarly, conducting R&D on technologies for detecting, preventing, and mitigating terrorist threats is vital to enhancing the security of the nation's transportation system. In our report on the Transportation Security Administration's (TSA) and DHS's transportation security R&D programs, we found that although TSA and DHS have made some efforts to coordinate R&D with each other and with other federal agencies, both their coordination with the Department of Transportation (DOT) and their outreach to the transportation industry have been limited. For example, officials from the modal administrations of DOT, which continue to conduct some transportation security R&D, said they had not provided any input into TSA's and DHS's transportation security R&D project selections. Consequently, DOT's and the transportation industry's security R&D needs may not be adequately reflected in TSA's and DHS's R&D portfolios. Therefore, we recommend that TSA and DHS (1) develop a process with DOT to coordinate transportation security R&D, such as a memorandum of agreement identifying roles and responsibilities and designating agency liaisons and (2) develop a vehicle to communicate with the transportation industry to ensure that its R&D security needs have been identified and considered. DHS generally concurred with our report and its recommendations. Given the dominant role that DHS plays in securing the homeland, it is critical that DHS be able to ensure that its management systems are operating as efficiently and effectively as possible. While it is understood that a transformation of this magnitude takes time and that DHS's immediate focus has been on its homeland security mission, we see the need for DHS to increase its focus on management issues. This is important not only to DHS itself, but also to the nation's homeland security efforts, because, in addition to managing its own organization, DHS plays a larger role in managing homeland security and in coordinating with the activities of other federal, state, local, and private stakeholders. This larger DHS role presents its own unique challenges. For example, DHS faces the challenge of clarifying the role of government versus the private sector. In April 2002, we testified that the appropriate roles and responsibilities within and between the levels of governments and with the private sector are evolving and need to be clarified. New threats are prompting a reassessment and shifting of long-standing roles and responsibilities. These shifts have been occurring on a piecemeal and ad hoc basis without the benefit of an overarching framework and criteria to guide the process. As another example, DHS faces a challenge in determining how federal resources are allocated to non-federal stakeholders. We have long advocated a risk management approach to guide the allocation of resources and investments for improving homeland security. Additionally, OMB has identified various tools, such as benefit-cost analysis, it considers useful in planning such as capital budgeting and regulatory decisionmaking. DHS must develop a commonly accepted framework and supporting tools to inform cost allocations in a risk management process. Although OMB asked the public in 2002 for suggestions on how to adjust standard tools to the homeland security setting, a vacuum currently exists in which benefits of homeland security investments are often not quantified and almost never valued in monetary terms. As a final example, DHS faces a challenge in sharing information among all stakeholders. DHS has initiatives underway to enhance information sharing (including the development of a homeland security enterprise architecture to integrate sharing between federal, state, and local authorities). However, our August 2003 report noted that these initiatives, while beneficial for the partners, presented challenges because they (1) were not well coordinated, (2) risked limiting participants' access to information, and (3) potentially duplicated the efforts of some key agencies at each level of government. We also found that despite various legislation, strategies, and initiatives, federal agencies, states, and cities did not consider the information sharing process to be effective. A well-managed DHS will be needed to meet these larger homeland security challenges. As DHS continues to evolve, integrate its functions, and implement its programs, we will continue to review its progress and provide information to Congress for oversight purposes. Mr. Chairman, this concludes my prepared statement. I will now be pleased to respond to any questions that you or other members of the subcommittee have. For further information about this testimony, please contact Norman J. Rabkin at 202-512-8777. Other key contributors to this statement were Stephen L. Caldwell, Wayne A. Ekblad, Carole J. Cimitile, Ryan T. Coles, Tammy R. Conquest, Benjamin C. Crawford, Heather J. Dunahoo, Kimberly M. Gianopoulos, David B. Goldstein, Randolph C. Hite, Robert G. Homan, Casey L. Keplinger, Eileen R. Larence, Michele Mackin, Lisa R. Shames, and Sarah E. Veale. 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 Department of Homeland Security (DHS) plays a key role in coordinating the nation's homeland security efforts with stakeholders in the federal, state, local, and private sectors. While GAO has conducted numerous reviews of specific DHS missions, such as border and transportation security and emergency preparedness, this testimony addresses overall DHS management issues. This testimony addresses (1) why GAO designated DHS's transformation as a high-risk area; and (2) the specific management challenges facing DHS. GAO designated DHS's transformation as a high-risk area in 2003, based on three factors. First, DHS faced enormous challenges in implementing an effective transformation process, developing partnerships, and building management capacity because it had to transform 22 agencies into one department. Second, DHS faced a broad array of operational and management challenges that it inherited from its component legacy agencies. Finally, DHS's failure to effectively address its management challenges and program risks could have serious consequences for our national security. Overall, DHS has made some progress, but significant management challenges remain to transform DHS into a more efficient organization while maintaining and improving its effectiveness in securing the homeland. Therefore, DHS's transformation remains a high-risk area. DHS faces a number of management challenges to improve its ability to carry out its homeland security missions. Among these challenges are providing focus for management efforts; monitoring transformation and integration; improving strategic planning; managing human capital; strengthening financial management infrastructure; establishing an information technology management framework; managing acquisitions; and coordinating research and development.

OPS, within the Department of Transportation's Research and Special Programs Administration (RSPA), administers the national regulatory program to ensure the safe transportation of natural gas and hazardous liquids by pipeline. The office attempts to ensure the safe operation of pipelines through regulation, national consensus standards, research, education (e.g., to prevent excavation-related damage), oversight of the industry through inspections, and enforcement when safety problems are found. The office uses a variety of enforcement tools, such as compliance orders and corrective action orders that require pipeline operators to correct safety violations, notices of amendment to remedy deficiencies in operators' procedures, administrative actions to address minor safety problems, and civil penalties. OPS is a small federal agency. In fiscal year 2003, OPS employed about 150 people, about half of whom were pipeline inspectors. Before imposing a civil penalty on a pipeline operator, OPS issues a notice of probable violation that documents the alleged violation and a notice of proposed penalty that identifies the proposed civil penalty amount. Failure by an operator to inspect the pipeline for leaks or unsafe conditions is an example of a violation that may lead to a civil penalty. OPS then allows the operator to present evidence either in writing or at an informal hearing. Attorneys from RSPA's Office of Chief Counsel preside over these hearings. Following the operator's presentation, the civil penalty may be reaffirmed, reduced, or withdrawn. If the hearing officer determines that a violation did occur, the Office of Chief Counsel issues a final order that requires the operator to correct the safety violation (if a correction is needed) and pay the penalty (called the "assessed penalty"). The operator has 20 days after the final order is issued to pay the penalty. The Federal Aviation Administration (FAA) collects civil penalties for OPS. From 1992 through 2002, federal law allowed OPS to assess up to $25,000 for each day a violation continued, not to exceed $500,000 for any related series of violations. In December 2002, the Pipeline Safety Improvement Act increased these amounts to $100,000 and $1 million, respectively. The effectiveness of OPS's enforcement strategy cannot be determined because OPS has not incorporated three key elements of effective program management--clear performance goals for the enforcement program, a fully defined strategy for achieving these goals, and performance measures linked to goals that would allow an assessment of the enforcement strategy's impact on pipeline safety. OPS's enforcement strategy has undergone significant changes in the last 5 years. Before 2000, the agency emphasized partnering with the pipeline industry to improve pipeline safety rather than punishing noncompliance. In 2000, in response to concerns that its enforcement was weak and ineffective, the agency decided to institute a "tough but fair" enforcement approach and to make greater use of all its enforcement tools, including larger and more frequent civil penalties. In 2001, to further strengthen its enforcement, OPS began issuing more corrective action orders requiring operators to address safety problems that led or could lead to pipeline accidents. In 2002, OPS created a new Enforcement Office to focus more on enforcement and help ensure consistency in enforcement decisions. However, this new office is not yet fully staffed, and key positions remain vacant. In 2002, OPS began to enforce its new integrity management and operator qualification standards in addition to its minimum safety standards. Initially, while operators were gaining experience with the new, complex integrity management standards, OPS primarily used notices of amendment, which require improvements in procedures, rather than stronger enforcement actions. Now that operators have this experience, OPS has begun to make greater use of civil penalties in enforcing these standards. OPS has also recently begun to reengineer its enforcement program. Efforts are under way to develop a new enforcement policy and guidelines, develop a streamlined process for handling enforcement cases, modernize and integrate the agency's inspection and enforcement databases, and hire additional enforcement staff. However, as I will now discuss, OPS has not put in place key elements of effective management that would allow it to determine the impact of its evolving enforcement program on pipeline safety. Although OPS has overall performance goals, it has not established specific goals for its enforcement program. According to OPS officials, the agency's enforcement program is designed to help achieve the agency's overall performance goals of (1) reducing the number of pipeline accidents by 5 percent annually and (2) reducing the amount of hazardous liquid spills by 6 percent annually. Other agency efforts--including the development of a risk-based approach to finding and addressing significant threats to pipeline safety and of education to prevent excavation-related damage to pipelines--are also designed to help achieve these goals. OPS's overall performance goals are useful because they identify the end outcomes, or ultimate results, that OPS seeks to achieve through all its efforts. However, OPS has not established performance goals that identify the intermediate outcomes, or direct results, that OPS seeks to achieve through its enforcement program. Intermediate outcomes show progress toward achieving end outcomes. For example, enforcement actions can result in improvements in pipeline operators' safety performance--an intermediate outcome that can then result in the end outcome of fewer pipeline accidents and spills. OPS is considering establishing a goal to reduce the time it takes the agency to issue final enforcement actions. While such a goal could help OPS improve the management of the enforcement program, it does not reflect the various intermediate outcomes the agency hopes to achieve through enforcement. Without clear goals for the enforcement program that specify intended intermediate outcomes, agency staff and external stakeholders may not be aware of what direct results OPS is seeking to achieve or how enforcement efforts contribute to pipeline safety. OPS has not fully defined its strategy for using enforcement to achieve its overall performance goals. According to OPS officials, the agency's increased use of civil penalties and corrective action orders reflects a major change in its enforcement strategy. However, although OPS began to implement these changes in 2000, it has not yet developed a policy that defines this new, more aggressive enforcement strategy or describes how it will contribute to the achievement of its performance goals. In addition, OPS does not have up-to-date, detailed internal guidelines on the use of its enforcement tools that reflect its current strategy. Furthermore, although OPS began enforcing its integrity management standards in 2002 and received greater enforcement authority under the 2002 pipeline safety act, it does not yet have guidelines in place for enforcing these standards or implementing the new authority provided by the act. According to agency officials, OPS management communicates enforcement priorities and ensures consistency in enforcement decisions through frequent internal meetings and detailed inspection protocols and guidance. Agency officials recognize the need to develop an enforcement policy and up-to-date detailed enforcement guidelines and have been working to do so. To date, the agency has completed an initial set of enforcement guidelines for its operator qualification standards and has developed other draft guidelines. However, because of the complexity of the task, agency officials do not expect that the new enforcement policy and remaining guidelines will be finalized until sometime in 2005. The development of an enforcement policy and guidelines should help define OPS's enforcement strategy; however, it is not clear whether this effort will link OPS's enforcement strategy with intermediate outcomes, since agency officials have not established performance goals specifically for their enforcement efforts. We have reported that such a link is important. According to OPS officials, the agency currently uses three performance measures and is considering three additional measures to determine the effectiveness of its enforcement activities and other oversight efforts. (See table 1.) The three current measures provide useful information about the agency's overall efforts to improve pipeline safety, but do not clearly indicate the effectiveness of OPS's enforcement strategy because they do not measure the intermediate outcomes of enforcement actions that can contribute to pipeline safety, such as improved compliance. The three measures that OPS is considering could provide more information on the intermediate outcomes of the agency's enforcement strategy, such as the frequency of repeat violations and the number of repairs made in response to corrective action orders, as well as other aspects of program performance, such as the timeliness of enforcement actions. We have found that agencies that are successful in measuring performance strive to establish measures that demonstrate results, address important aspects of program performance, and provide useful information for decision-making. While OPS's new measures may produce better information on the performance of its enforcement program than is currently available, OPS has not adopted key practices for achieving these characteristics of successful performance measurement systems: Measures should demonstrate results (outcomes) that are directly linked to program goals. Measures of program results can be used to hold agencies accountable for the performance of their programs and can facilitate congressional oversight. If OPS does not set clear goals that identify the desired results (intermediate outcomes) of enforcement, it may not choose the most appropriate performance measures. OPS officials acknowledge the importance of developing such goals and related measures but emphasize that the diversity of pipeline operations and the complexity of OPS's regulations make this a challenging task. Measures should address important aspects of program performance and take priorities into account. An agency official told us that a key factor in choosing final measures would be the availability of supporting data. However, the most essential measures may require the development of new data. For example, OPS has developed databases that will track the status of safety issues identified in integrity management and operator qualification inspections, but it cannot centrally track the status of safety issues identified in enforcing its minimum safety standards. Agency officials told us that they are considering how to add this capability as part of an effort to modernize and integrate their inspection and enforcement databases. Measures should provide useful information for decision-making, including adjusting policies and priorities. OPS uses its current measures of enforcement performance in a number of ways, including monitoring pipeline operators' safety performance and planning inspections. While these uses are important, they are of limited help to OPS in making decisions about its enforcement strategy. OPS has acknowledged that it has not used performance measurement information in making decisions about its enforcement strategy. OPS has made progress in this area by identifying possible new measures of enforcement results (outcomes) and other aspects of program performance, such as indicators of the timeliness of enforcement actions, that may prove more useful for managing the enforcement program. In 2000, in response to criticism that its enforcement activities were weak and ineffective, OPS increased both the number and the size of the civil monetary penalties it assessed. Pipeline safety stakeholders expressed differing opinions about whether OPS's civil penalties are effective in deterring noncompliance with pipeline safety regulations. OPS assessed more civil penalties during the past 4 years under its current "tough but fair" enforcement approach than it did in the previous 5 years, when it took a more lenient enforcement approach. (See fig. 2.) From 2000 through 2003, OPS assessed 88 civil penalties (22 per year on average) compared with 70 civil penalties from 1995 through 1999 (about 14 per year on average). For the first 5 months of 2004, OPS proposed 38 civil penalties. While the recent increase in the number and the size of civil penalties may reflect OPS's new "tough but fair" enforcement approach, other factors, such as more severe violations, may be contributing to the increase as well. Overall, OPS does not use civil penalties extensively. Civil penalties represent about 14 percent (216 out of 1,530) of all enforcement actions taken over the past 10 years. OPS makes more extensive use of other types of enforcement actions that require pipeline operators to fix unsafe conditions and improve inadequate procedures, among other things. In contrast, civil penalties represent monetary sanctions for violating safety regulations but do not require safety improvements. OPS may increase its use of civil penalties as it begins to use them to a greater degree for violations of its integrity management standards. The average size of the civil penalties has increased. For example, from 1995 through 1999, the average assessed civil penalty was about $18,000. From 2000 through 2003, the average assessed civil penalty increased by 62 percent to about $29,000. Assessed penalty amounts ranged from $500 to $400,000. In some instances, OPS reduces proposed civil penalties when it issues its final order. We found that penalties were reduced 31 percent of the time during the 10-year period covered by our work (66 of 216 instances). These penalties were reduced by about 37 percent (from a total of $2.8 million to $1.7 million). The dollar difference between the proposed and the assessed penalties would be over three times as large had our analysis included the extraordinarily large penalty for the Bellingham, Washington, incident. For this case, OPS proposed a $3.05 million penalty and had assessed $250,000 as of May 2004. If we include this penalty, then over this period OPS reduced total proposed penalties by about two-thirds, from about $5.8 million to about $2 million. OPS's database does not provide summary information on why penalties are reduced. According to an OPS official, the agency reduces penalties when an operator presents evidence that the OPS inspector's finding is weak or wrong or when the pipeline's ownership changes during the period between the proposed and assessed penalty. It was not practical for us to gather information on a large number of penalties that were reduced, but we did review several to determine the reasons for the reductions. OPS reduced one of the civil penalties we reviewed because the operator provided evidence that OPS inspectors had miscounted the number of pipeline valves that OPS said the operator had not inspected. Since the violation was not as severe as OPS had stated, OPS reduced the proposed penalty from $177,000 to $67,000. Of the 216 penalties that OPS assessed from 1994 through 2003, pipeline operators paid the full amount 93 percent of the time (200 instances) and reduced amounts 1 percent of the time (2 instances). (See fig. 3.) Fourteen penalties (6 percent) remain unpaid, totaling about $837,000 (or 18 percent of penalty amounts). In two instances, operators paid reduced amounts. We followed up on one of these assessed penalties. In this case, the operator requested that OPS reconsider the assessed civil penalty and OPS reduced it from $5,000 to $3,000 because the operator had a history of cooperation and OPS wanted to encourage future cooperation. For the 14 unpaid penalties, neither FAA's nor OPS's data show why the penalties have not been collected. We expect to present a fuller discussion of the reasons for these unpaid penalties and OPS's and FAA's management controls over the collection of penalties when we report to this and other committees next month. Although OPS has increased both the number and the size of the civil penalties it has imposed, the effect of this change on deterring noncompliance with safety regulations, if any, is not clear. The stakeholders we spoke with expressed differing views on whether the civil penalties deter noncompliance. The pipeline industry officials we contacted believed that, to a certain extent, OPS's civil penalties encourage pipeline operators to comply with pipeline safety regulations because they view all of OPS's enforcement actions as deterrents to noncompliance. However, some industry officials said that OPS's enforcement actions are not their primary motivation for safety. Instead, they said that pipeline operators are motivated to operate safely because they need to avoid any type of accident, incident, or OPS enforcement action that impedes the flow of products through the pipeline and hinders their ability to provide good service to their customers. Pipeline industry officials also said that they want to operate safely and avoid pipeline accidents because accidents generate negative publicity and may result in costly private litigation against the operator. Most of the interstate agents, representatives of their associations, and insurance company officials expressed views similar to those of the pipeline industry officials, saying that they believe civil penalties deter operators' noncompliance with regulations to a certain extent. However, a few disagreed with this point of view. For example, the state agency representatives and a local government official said that OPS's civil penalties are too small to be deterrents. Pipeline safety advocacy groups that we talked to also said that the civil penalty amounts OPS imposes are too small to have any deterrent effect on pipeline operators. As discussed earlier, for 2000 through 2003, the average assessed penalty was about $29,000. According to economic literature on deterrence, pipeline operators may be deterred if they expect a sanction, such as a civil penalty, to exceed any benefits of noncompliance. Such benefits could, in some cases, be lower operating costs. The literature also recognizes that the negative consequences of noncompliance--such as those stemming from lawsuits, bad publicity, and the value of the product lost from accidents--can deter noncompliance along with regulatory agency oversight. Thus, for example, the expected costs of a legal settlement could overshadow the lower operating costs expected from noncompliance, and noncompliance might be deterred. Mr. Chairman, this concludes my prepared statement. We expect to report more fully on these and other issues when we complete our work next month. We also anticipate making recommendations to improve OPS's ability to demonstrate the effectiveness of its enforcement strategy and to improve OPS's and FAA's management controls over the collection of civil penalties. I would be pleased to respond to any questions that you or Members of the Committee might have. For information on this testimony, please contact Katherine Siggerud at (202) 512-2834 or [email protected]. Individuals making key contributions to this testimony are Jennifer Clayborne, Judy Guilliams- Tapia, Bonnie Pignatiello Leer, Gail Marnik, James Ratzenberger, and Gregory Wilmoth. 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.

Interstate pipelines carrying natural gas and hazardous liquids (such as petroleum products) are safer to the public than other modes of freight transportation. The Office of Pipeline Safety (OPS), the federal agency that administers the national regulatory program to ensure safe pipeline transportation, has been undertaking a broad range of activities to make pipeline transportation safer. However, the number of serious accidents--those involving deaths, injuries, and property damage of $50,000 or more--has not fallen. Among other things, OPS takes enforcement action against pipeline operators when safety problems are found. OPS has several enforcement tools to require the correction of safety violations. It can also assess monetary sanctions (civil penalties). This testimony is based on ongoing work for the Senate Committee on Commerce, Science and Transportation and for other committees, as required by the Pipeline Safety Improvement Act of 2002. The testimony provides preliminary results on (1) the effectiveness of OPS's enforcement strategy and (2) OPS's assessment of civil penalties. The effectiveness of OPS's enforcement strategy cannot be determined because the agency has not incorporated three key elements of effective program management--clear program goals, a well-defined strategy for achieving goals, and performance measures that are linked to program goals. Without these key elements, the agency cannot determine whether recent and planned changes in its strategy will have the desired effects on pipeline safety. Over the past several years, OPS has focused on other efforts--such as developing a new risk-based regulatory approach--that it believes will change the safety culture of the industry. While OPS has become more aggressive in enforcing its regulations, it now intends to further strengthen the management of its enforcement program. In particular, OPS is developing an enforcement policy that will help define its enforcement strategy and has taken initial steps toward identifying new performance measures. However, OPS does not plan to finalize the policy until 2005 and has not adopted key practices for achieving successful performance measurement systems, such as linking measures to goals. OPS increased both the number and the size of the civil penalties it assessed against pipeline operators over the last 4 years (2000-2003) following its decision to be "tough but fair" in assessing penalties. OPS assessed an average of 22 penalties per year during this period, compared with an average of 14 per year for the previous 5 years (1995-1999), a period of more lenient "partnering" with industry. In addition, the average penalty increased from $18,000 to $29,000 over the two periods. About 94 percent of the 216 penalties levied from 1994 through 2003 have been paid. The civil penalty is one of several actions OPS can take when it finds a violation, and these penalties represent about 14 percent of all enforcement actions over the past 10 years. While OPS has increased the number and size of civil penalties, stakeholders--including industry, state, and insurance company officials and public advocacy groups--expressed differing views on whether these penalties deter noncompliance with safety regulations. Some, such as pipeline operators, thought that any penalty was a deterrent if it kept the pipeline operator in the public eye, while others, such as safety advocates, told us that the penalties were too small to be effective sanctions.

Iodine, palladium, and iridium are the radioactive sources most commonly used in brachytherapy. The brachytherapy procedure is typically performed in the outpatient setting where, under the OPPS, costs associated with a procedure are generally bundled in order to promote hospital efficiency. However, since the OPPS was implemented in 2000, an increasing number of technologies have been paid separately. Except in 2003, the one year in which iodine and palladium used to treat prostate cancer and iridium were bundled into payment for brachytherapy procedures, all radioactive sources used in brachytherapy have been paid separately. Radioactive sources are used in brachytherapy to treat a variety of types of cancers. The most prevalent brachytherapy procedure is low-dose brachytherapy with iodine or palladium, which is typically provided for early-stage prostate cancer. During this procedure, approximately 20 to 200 tiny iodine or palladium sources are implanted in the prostate, deliver radiation over a period of months, and then remain permanently in the body. Generally, the choice between iodine and palladium is determined by the aggressiveness of the tumor, and the number of sources by the size of the prostate. In recent years, utilization of the high-dose brachytherapy procedure, which typically uses iridium, has grown. Iridium can be used to treat a variety of advanced-stage cancers--most commonly gynecological cancers. In high-dose brachytherapy, a single, highly radioactive iridium source is implanted in the tumorous area for a brief period--a matter of minutes or hours--and then withdrawn. Depending on a patient's clinical needs, the patient may receive one or more such treatments, also known as fractions, with the same source over the course of several days. Because an iridium source emits sufficient radiation for 3 months, the same source can be used to treat multiple patients. The payment methodology for outpatient services has varied in the degree to which it relies on bundled payments to promote hospital efficiency. Prior to OPPS implementation in 2000, payment for outpatient items and services was not bundled; rather, hospitals were paid under a complex array of cost-based reimbursement methods and fee schedules. Generally, neither of these payment methodologies provides a strong incentive to furnish services efficiently. Under a cost-based methodology, each hospital is paid its cost based on information it reports to CMS. Under a fee schedule methodology, all hospitals receive a prospectively determined rate for each item and service they provide, but little incentive exists for them to provide only the necessary items and services. Under the Balanced Budget Act of 1997, CMS was required to implement the OPPS, which was designed to streamline the historically complex system of payment for outpatient care and better promote hospital efficiency. CMS assigns each outpatient procedure to one of approximately 850 ambulatory payment classification (APC) groups. Each APC group includes procedures that share cost and clinical similarities and has one payment rate for all procedures in the group. To set an APC rate, CMS uses historical claims to calculate a median cost across a group's procedures that includes the costs of the associated bundled services and supplies, which are known as "packaged" costs. A median, rather than a mean, gives less weight to extreme values. That median cost is then converted into a numeric weight, which determines the payment hospitals receive for all procedures assigned to the APC. Because the OPPS provides a single payment to cover the average total cost of a procedure, the incentive for each hospital to efficiently provide the necessary items and services associated with that procedure is greater than when the hospital is paid its cost or a separate fee schedule payment for each item and service used in the procedure. Although bundling is a fundamental principle of the OPPS, the number of technologies that are paid separately from their associated procedures has increased since the implementation of the payment system. Beginning in 2000, the first year of the OPPS, CMS was required to make temporary, separate payments--referred to as "transitional pass-through payments"-- for technologies that it determines to meet specified criteria for being new and high cost. These payments supplement the bundled payments for outpatient procedures associated with the technologies, and are designed to compensate hospitals for the additional cost. A new technology is eligible for pass-through payments for 2 to 3 years, after which time the technology is no longer considered new and CMS can include the technology in the payment bundle for the associated procedure. Over time, other high-cost technologies that are not new--mainly certain drugs and radiopharmaceuticals--have also been designated for separate payment either by Congress or by CMS. The payment methodology for radioactive sources associated with brachytherapy has changed several times since the inception of the OPPS. CMS was required to make separate pass-through payments for all radioactive sources associated with brachytherapy beginning in 2000. In 2003, these technologies were no longer eligible for pass-through payments. Because they are considered devices by Medicare, and devices are typically bundled into payment for their associated procedures, CMS bundled iodine and palladium into the payment bundle for the low-dose brachytherapy procedure for prostate cancer, and iridium into the payment bundle for the high-dose brachytherapy procedure, regardless of cancer type. For iodine and palladium sources provided for conditions other than prostate cancer, CMS continued to pay separately. Instead of paying separately for these radioactive sources at each hospital's cost, CMS set prospective rates for 2003 based on the median cost of each source across hospitals. The MMA mandated that all brachytherapy sources be paid separately after 2003 and specified that from January 1, 2004, through December 31, 2006, separate payments for the sources be at each hospital's cost. The MMA did not specify a methodology for paying separately after this date. When paying separately for technologies that are not new, CMS's general practice is to set a prospective rate for all hospitals, based on an average unit cost across hospitals. However, certain technologies may vary in cost substantially and unpredictably or there may not be reasonably accurate data on which to base an average cost across hospitals. In either case, CMS pays for these technologies at each hospital's cost. Although CMS does not use published criteria to determine payment amounts for separately paid technologies that are not new, we found that its general practice is to pay prospectively based on the average historical cost of each technology across hospitals. A prospective rate, even for technologies that are separately paid, is desirable because basing a rate on an average encourages those hospitals that provide the technology to minimize their acquisition costs. To set prospective rates for these separately paid technologies, CMS currently uses two sources of historical data: manufacturer data and OPPS claims. For example, CMS pays for certain high-cost drugs prospectively based on average per-unit acquisition cost. To calculate hospital acquisition cost, CMS relies on per-unit average sales price (ASP) data, which manufacturers are required to submit to CMS and are used in making payments for physician-administered drugs. CMS also uses ASP data to pay a per-unit rate for particular orphan drugs, which are drugs used to treat patients with rare conditions and are typically high in cost. For drugs where CMS does not have ASP data, CMS pays based on the mean cost calculated from OPPS claims. When a technology's unit cost varies substantially and unpredictably, or when reasonably accurate cost data are not available, CMS pays for the technology at each hospital's cost. If the cost varies substantially and unpredictably, a prospective rate based on a historical average may not adequately pay hospitals even if they operate efficiently. CMS pays each hospital's cost, for example, for corneal transplant tissue and certain vaccines, including those for flu and pneumonia. CMS uses this methodology for corneal transplant tissue because, after analyzing data submitted by hospitals and other stakeholders, the agency determined that the fees eye banks charge hospitals for this tissue can vary substantially and unpredictably over time and across eye banks in a given year. The amount of the fee charged by an eye bank depends heavily on the level of charitable donations it receives, which it uses to subsidize the cost of providing the tissue. The cost to hospitals of providing vaccines also varies substantially and unpredictably due to instability in the nation's vaccine supply. In other cases, CMS makes cost-based payments for technologies when it determines that reasonably accurate historical data on unit cost are not available. For example, the MMA mandated separate payment for certain radiopharmaceuticals. As we discussed in our 2006 report on OPPS payment for certain drugs and radiopharmaceuticals, differences among hospitals in how these technologies are purchased make it difficult for CMS to set a prospective rate based on an average cost across hospitals. As a result, payment for these radiopharmaceuticals is based on each hospital's cost. Based on our analysis, the absence of wide variability in the unit costs of iodine and palladium and the availability of reasonably accurate historical data makes these radioactive sources suitable for prospective payment rates. We were unable to establish a unit cost for iridium and, as a result, could not identify a suitable payment methodology. CMS has OPPS claims data from hospitals that provided iridium, and would be able to use these data to calculate an average unit cost across hospitals and to identify which methodology is suitable for determining a separate payment amount. Our analysis suggests that CMS would be able to develop prospective rates for iodine and palladium beginning in 2007. Based on interviews we conducted with hospital and manufacturer officials, and the results of our hospital survey, we determined that iodine and palladium have identifiable unit costs and that these costs do not appear to vary substantially and unpredictably across hospital purchases at a given point in time or from year to year. Both hospitals and manufacturers told us that hospitals generally purchase iodine and palladium sources at a per-source price, making the calculation of a unit cost straightforward. According to our survey of 121 hospitals on the prices they paid during 1 year--specifically, from July 2003 through June 2004--the range of iodine and palladium prices is not wide. This is indicated by the relative level of precision-- technically, the coefficient of variation--achieved for our estimated mean price. (See table 1.) We also note that iodine and palladium are not subject to the same supply and demand conditions as corneal transplant tissue and flu and pneumonia vaccines--conditions that lead to substantial and unpredictable cost variation from year to year. Although CMS uses ASP data to set a prospective rate for certain high-cost drugs, CMS currently does not have ASP data for radioactive sources used in brachytherapy. However, we found that OPPS claims provide a reasonably accurate source of data for setting a prospective rate for iodine and palladium sources. To determine if claims could be used as a reasonable data source, we compared the payment rates for 2003 and the proposed payment rates for 2004, which were based on median costs calculated from historical claims, with the median of the per-source purchase prices reported directly to us by hospitals. Although the payment rates applied only to sources used in non-prostate brachytherapy, CMS officials told us that they were calculated using prostate and non-prostate brachytherapy claims with iodine and palladium sources. We found that for iodine the prospectively set rate for 2003 and proposed rate for 2004 were $31.33 and $36.35, respectively, and the median of reported purchase prices was $25.37. For palladium, the prospectively set rate for 2003 and proposed rate for 2004 were $43.96 and $44.00, respectively, and the median reported purchase price was $45.46. Since 2004, when CMS was required to pay separately for all iodine and palladium sources, the agency has been accumulating claims data that include separate charges for these sources. As a result, CMS will have data from 2005 for the 2007 payment year. These data could be used to set prospective payment rates, either based on a mean--as is currently done with certain high-cost drugs--or based on a median--which CMS used to set the 2003 and proposed 2004 rates for iodine and palladium sources. Due to the reusable nature of the iridium source, identifying its unit cost is not as straightforward as identifying the unit cost of iodine and palladium. Over the course of its 3-month life span, an iridium source can be temporarily implanted in multiple patients and each of those patients can receive about 1 to 10 such treatments with the same source. Therefore, the appropriate unit cost of an iridium source is the per-treatment cost--the average cost of all treatments administered across all patients over a 3- month period. When hospitals purchase an iridium source, they may not know the exact number of patients they will treat or the number of treatments each of those patients will receive. Therefore, hospitals must bill Medicare based on projections of their unit cost, and will only be able to identify their actual unit cost retrospectively. We asked hospitals to provide the per-treatment cost of iridium sources they purchased over a previous 12-month period in order to identify a unit cost. However, we did not receive enough data to identify the per- treatment cost. Of 121 total hospitals surveyed, 19 responded with data on iridium, and the majority of these 19 hospitals did not provide data we could use to estimate the cost per treatment. Specifically, 11 either did not provide the number of treatments, reported a questionable source price, or both. Eight hospitals reported a source price and the number of treatments from which a unit cost could be calculated. However, among these 8 hospitals there were inconsistencies in the data provided. Some hospitals reported the total price of their iridium contracts, while other hospitals isolated the price of the radioactive source within their contracts and reported that price. Because we could not establish a unit cost, we could not assess if the unit cost of iridium varies substantially and unpredictably over time. Although we could not identify an average per-treatment cost from our survey data, CMS has OPPS claims data from hospitals that provided iridium. Using these data, CMS would be able to evaluate whether the range of costs comprising the average is substantial and whether the cost varied unpredictably. Such an analysis would help CMS identify a suitable methodology for determining a separate payment amount. Under the OPPS, an increasing number of technologies have been designated for separate payment, either by Congress or by CMS. Pursuant to the MMA, radioactive sources used in brachytherapy, including iodine, palladium, and iridium, are among those technologies. Based on our analysis, CMS can pay separately for iodine and palladium sources using prospective rates because the unit cost of the sources does not vary substantially and unpredictably. In addition, CMS has data available to identify reliable average costs across hospitals to set prospective payment rates beginning in 2007. Paying prospectively in this manner would help encourage hospital efficiency. However, we were not able to identify a suitable methodology for determining a separate payment amount for iridium sources because we did not receive sufficient information from hospitals to estimate an average per-treatment cost across hospitals. In order to identify a suitable methodology for determining a separate payment amount, CMS would be able to use OPPS claims data to evaluate whether the range of costs comprising the average is substantial and whether the average per-treatment cost varies unpredictably over time. In order to promote the efficient delivery of radioactive sources associated with outpatient brachytherapy, we recommend that the Secretary of Health and Human Services direct the Administrator of CMS to take the following two actions: Set prospective payment rates for iodine and palladium sources with each rate based on the source's average--that is, the mean or median--unit cost across hospitals estimated from OPPS claims data. Use claims data to evaluate the unit cost of iridium so that a suitable, separate payment methodology can be determined. We received written comments on a draft of this report from CMS (see app. II). We also received oral comments from individuals at five organizations representing manufacturers of radioactive sources used in brachytherapy and providers of brachytherapy. These included the Coalition for the Advancement of Brachytherapy, which represents manufacturers of radioactive sources; the Association of Community Cancer Centers (ACCC), which represents hospitals that provide cancer treatment; and three organizations representing physicians and others involved in providing brachytherapy: the American College of Radiation Oncology (ACRO), the American Brachytherapy Society (ABS), and the American Society for Therapeutic Radiation and Oncology (ASTRO). We also received technical comments from CMS and the external reviewers, which we incorporated as appropriate. In reviewing our draft report, CMS stated that it appreciated our analysis and will consider our recommendations on iodine, palladium, and iridium as it develops payment policy for 2007. CMS also noted that we did not make recommendations on payment for other radioactive sources associated with brachytherapy that may be separately payable in 2007. As stated in our draft report, we examined how payment amounts for iodine, palladium, and iridium could be determined. In 2002, these three sources were billed on 98 percent of the claims for radioactive sources associated with brachytherapy. Medicare pays for seven other radioactive sources used in brachytherapy--gold-198, low-dose iridium, yttrium-90, cesium-131, liquid iodine-125, ytterbium-169, and linear palladium-102. We did not examine how payment for those sources could be determined because sufficient data on those sources were not available in the 2002 claims used to construct the sample of hospitals for our survey. Medicare did not pay for cesium-131, ytterbium-169, and linear palladium-102 in 2002, and gold-198, low-dose iridium, liquid iodine-125, and yttrium-90 together appeared on 2 percent of the approximately 22,000 claims for radioactive sources in that year. Although we did not examine how payment amounts could be determined for these seven sources, the analytical framework we used may apply to them as well. Comments from external reviewers representing manufacturers of radioactive sources and providers of brachytherapy centered on three different areas: our recommendation to pay prospectively for iodine and palladium sources; our recommendation that CMS evaluate the unit cost of iridium; and payment for radioactive sources other than iodine, palladium, and iridium. Representatives from CAB disagreed with our recommendation to set prospective rates for iodine and palladium using OPPS claims data. They asserted that price variation due to the range of available iodine and palladium products makes it inappropriate to pay for sources prospectively based on averages. In their opinion, our finding that the unit costs of iodine and palladium sources are generally stable was compromised by limitations in our hospital survey--specifically, our exclusion of outlier data and the absence of source configuration information in many of the surveys we received from hospitals. ACCC stated that OPPS claims data are flawed and that prospective rates may be appropriate but only when a more accurate data source is available. They also noted, as did ACRO representatives, that costs incurred by hospitals for storing and handling radioactive sources were not represented in our survey results. Representatives from ASTRO, ABS, and ACRO agreed with our recommendation that payment can be based on an average. ACRO representatives cautioned that the data used to set the payment must be representative of different types of hospitals, and ABS representatives suggested that the data should reflect the increased use of stranded sources, which they stated are more costly but considered clinically advantageous by many physicians. Regarding our recommendation that CMS use OPPS claims data to evaluate the unit cost of iridium in order to determine a suitable separate payment methodology, representatives from CAB said the report accurately conveys the difficulties of identifying a per-unit cost for iridium. However, they disagreed with our recommendation because they said it would not be possible for CMS to fully evaluate a unit cost using OPPS claims data, which they asserted to be flawed. They stated that the cost of iridium varies substantially and unpredictably and would not be appropriate for prospective payment based on an average. Representatives from ASTRO, ABS, and ACRO agreed with our recommendation, although they expressed confidence that the unit cost of iridium would be found to vary substantially and unpredictably and would therefore be inappropriate for prospective payment based on an average cost calculated across hospitals. Finally, other comments focused on payment for radioactive sources other than iodine, palladium, and iridium. Representatives of ASTRO and CAB noted that we did not specifically address payment for the other radioactive sources used in brachytherapy--gold-198, low-dose iridium, yttrium-90, cesium-131, liquid iodine-125, ytterbium-169, and linear palladium-102--and ASTRO asked whether we would be making recommendations on payment for these other radioactive sources. Concerning the comments that variation in source price makes it inappropriate to pay prospectively for sources, as noted in the draft report, we based our finding on the low coefficient of variation we calculated from surveys received from our representative sample of hospitals. We do not believe that our exclusion of outlier data masked the true degree of price variation. We used standard statistical trimming principles, which resulted in the exclusion of only 2 percent of reported purchases of iodine and none of the reported purchases of palladium. Although many of the responding hospitals did not indicate on the survey the configuration of the sources purchased, we instructed hospitals to list prices for all sources purchased during the survey period. Therefore, the variation we calculated from hospital responses can be expected to reflect the range of products purchased by hospitals at the time. Representatives from ACRO and ABS stated that they believed the average prices presented in the draft report were consistent with prices for the types of sources--loose, low-activity sources--commonly used during the survey period. If costlier stranded sources have become more frequently used since the survey period of July 1, 2003 through June 30, 2004, as stated by representatives of ACRO and ABS, the use of those sources would be captured in OPPS claims data from subsequent years and reflected in future prospectively set rates. Regarding the concerns about basing prospectively set rates for iodine and palladium on OPPS claims data, as noted in the draft report, we based our recommendation on our comparison of average purchase prices for those sources from our hospital survey with CMS payment rates for 2003 and proposed payment rates for 2004, which CMS derived from OPPS claims data. Concerning the comments about the cost of storing and handling radioactive sources, CMS has provided guidance to hospitals on how they can receive reimbursement for those costs. With respect to our recommendation on payment for iridium, as noted in the draft report, we are recommending that CMS use its claims data to evaluate whether the range of costs comprising the average for a given year is substantial across hospitals and whether this average unit cost varied unpredictably over time. Consistent with its general practice for paying separately for technologies that are not new, CMS could pay for iridium at each hospital's cost if OPPS claims did not prove to be a reasonable source of data or if CMS determined that the unit cost varies substantially and unpredictably over time. As we noted in our response to comments received from CMS, we limited our examination of payment for radioactive sources to iodine, palladium, and iridium because sufficient data on the other sources were unavailable in the 2002 claims used to construct the sample of hospitals for our survey, and these three sources were billed on 98 percent of the claims for radioactive sources associated with brachytherapy. We are sending a copy of this report to the Administrator of CMS. We will also provide copies to others on request. The report is available at no charge on GAO's Web site at http://www.gao.gov. If you or your staffs have any questions, please contact me at (202) 512- 7119 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. This appendix summarizes the sample design, methods for collecting and processing the data, and methods for estimating mean and median purchase prices for iodine and palladium sources used in brachytherapy. Though we were not able to estimate mean and median purchase prices for iridium, this appendix also includes a discussion of the data we received. We developed a random sample of hospitals to survey for the purchase prices of iodine, palladium, and iridium sources used in brachytherapy. The sample frame consisted of 949 hospitals that (1) had charged Medicare for radioactive sources during 2002, the most recent year for which usable data were available; (2) were still Medicare providers on July 1, 2004; and (3) were a subset of sample hospitals drawn for a survey we conducted of hospital outpatient drug prices. The sampling frame contained 98 percent of the 968 hospitals that submitted Medicare claims for the three brachytherapy sources in 2002. We drew a sample of 121 hospitals from the sample frame, on the basis of an expected response rate of 50 percent. Our results can be generalized to the larger population of hospitals providing iodine and palladium in the outpatient setting and meeting the above criteria. To improve the precision of our estimates of mean and median purchase price, we stratified the sample of hospitals. The objective was to obtain a sample of hospitals that mirrored the distribution of hospitals billing Medicare for these sources. Because we did not have a measure of purchase price of radioactive sources at the time we selected the sample, we used total hospital outpatient drug charges to Medicare as a proxy for purchase price variation. We used a regression model to identify stratification factors (such as teaching hospital status) that would maximize the difference in mean purchase price (as proxied by Medicare drug charges) among strata. We grouped hospitals into major teaching hospital, nonmajor teaching hospital, urban nonteaching hospital, and rural nonteaching hospital strata. We placed small hospitals in a separate stratum to ensure that hospitals with no or minimal charges for drugs during the first 6 months of 2003 were appropriately represented. In our sample design, we defined a major teaching hospital as a hospital for which the ratio of residents to the average daily number of patients was at least 1 to 4 and a nonmajor teaching hospital as one having a ratio of residents to patients of less than 1 to 4. We defined a hospital as urban if it was located in a county considered a metropolitan statistical area (as defined by the Office of Management and Budget) and rural if it was located in a county not considered a metropolitan statistical area. We defined a small hospital as a hospital with total Medicare drug charges of less than $10,000 during the first 6 months of 2003. To develop our survey of hospital purchase prices for radioactive sources, we interviewed representatives from the Coalition for the Advancement of Brachytherapy (CAB). CAB reports that it represents manufacturers of 90 percent of all brachytherapy sources and 100 percent of high-dose rate brachytherapy sources in the United States. We also interviewed representatives of the American Brachytherapy Society, the American College of Radiation Oncology, the American Society for Therapeutic Radiology and Oncology, and the Association of Community Cancer Centers. We also interviewed representatives from six radioactive source manufacturers and seven hospitals and officials at the Centers for Medicare & Medicaid Services. In developing the survey, we obtained information from these associations and individual hospitals and pilot tested the survey with 5 hospitals prior to sending it to the entire sample of 121 hospitals. As a result, we clarified certain protocols and procedures but did not substantially change the survey instrument. The survey instrument was five pages long with one page for each radioactive source, one page for rebate data, and one page defining the terms in the previous pages. We collected data by reported purchase--that is, the purchase of a given quantity of a radioactive source at a particular price on a specific date. For iodine and palladium sources, we asked hospitals to provide the name of the manufacturer; the number of sources; the price per source; and certain characteristics of the sources purchased, such as radioactivity level. For iridium, we asked hospitals to provide the name of the manufacturer, the number of treatments delivered, the source price, and the rebate eligibility. We also asked hospitals to report information on any rebates they received for these purchases. We contracted with Westat to administer the survey. Westat began data collection on September 27, 2004. Key components of the data collection protocol were a first mailing to the chief executive officer or chief financial officer of each hospital explaining the survey, followed by a telephone call to identify the main point of contact; a second mailing to the main contact outlining the data that were needed and describing the options for submitting the data; a follow-up telephone call to facilitate the main contact's understanding of the data collection, provide technical assistance as needed, and obtain some basic information about the hospital; and telephone calls at regular intervals to remind the hospitals to submit their data and to provide assistance as needed. Hospitals could submit data in one of three ways: by uploading electronic files through the study Web site, by sending an e-mail to the study address with data attached, or by sending electronic media or paper submissions through the mail. When our contractor received a brachytherapy survey from a hospital, it forwarded the survey to us for processing and analysis. Of the 121 hospitals surveyed, 62 hospitals submitted usable data, resulting in an overall response rate of 51 percent. We considered iodine and palladium data usable if we were able to identify the price per source and the number of sources purchased. We considered iridium data usable if we were able to identify the price per source and the number of fractions provided with the source. Of the 62 hospitals, 52 hospitals submitted usable data for iodine and 40 hospitals submitted usable data for palladium, with some providing data for both radioactive sources. Sixty- five percent of hospitals providing data for iodine and 63 percent of hospitals providing data for palladium were teaching hospitals. Our data were not sufficient to measure overall price differences by radioactivity level and other characteristics across each of the two types of sources. Specifically, hospitals did not indicate activity level for 37 percent of their reported purchases of iodine and 47 percent of their reported purchases of palladium. They did not indicate source configuration for 43 percent of their reported purchases of iodine and 51 percent of their reported purchases of palladium. Although we did not receive enough data from hospitals to reliably identify any price differences by source characteristic, we instructed hospitals to report all their purchases during the survey period. Therefore, any price variation due to source characteristic should be reflected in our data. We applied statistical trimming rules to eliminate outliers in the data. Accordingly, 2 percent of the reported purchases of iodine were trimmed, and none of the reported purchases of palladium were trimmed. The resulting data allowed us to calculate the mean and median price per source for iodine and palladium. Few hospitals reported receiving rebates. This is consistent with information we received from hospitals during interviews--that manufacturer rebates were not commonly provided for radioactive sources. Therefore, we did not factor rebates into our mean and median purchase prices. We determined that there were insufficient data to estimate the price of iridium. Of the 19 hospitals submitting iridium data, 11 either did not provide number of treatments, reported a questionable iridium source price, or both. Eight hospitals reported an iridium source price and the number of treatments from which a unit cost could be calculated. However, among these 8 hospitals there were inconsistencies in the data provided. Some hospitals reported the total price of their iridium contracts, which includes the cost of maintaining the iridium source, while other hospitals isolated the price of the iridium source within the contracts and reported that price. This section describes the rationale and method for weighting the hospital sample, calculating mean purchase price, calculating median purchase price, and calculating the associated coefficients of variation--or standard error reflecting sample design and weights. To estimate hospitals' mean and median purchase prices for iodine and palladium sources, the sample hospitals' purchase price data were weighted to make them representative of the sample frame of hospitals from which the sample was drawn. The less likely that a hospital was sampled, the larger its weight. For example, if each hospital had a 1 in 10 probability of being sampled, its sample weight was 10. That is, each hospital in the sample represents 10 hospitals in the sample frame. Consequently, if 5 hospitals in a sample bought a particular radioactive source, and the sample weight was 10, we estimate that 50 hospitals in the frame bought that radioactive source. In this report, we refer to sample weights as "hospital weights." Our sample was stratified, so all hospitals in a particular stratum (for example, major teaching hospitals) had the same weight. Since in our sample the probability of a hospital's being selected varied by stratum, hospitals in different strata had different weights. We calculated the hospital weight as Wjh denotes the hospital weight for the jth radioactive source in the hth Njh denotes the sample frame (the total number of hospitals) that according to Medicare outpatient claims, billed for the jth radioactive source in the hth stratum; and Rjh denotes the total number of hospitals in the hth stratum that purchased the jth radioactive source, according to their survey submissions. This weight recognizes that not all hospitals responded to our survey, since the weight's denominator is Rjh--the number of hospitals that responded to the survey and indicated that they bought the jth radioactive source. To summarize hospitals' purchase prices for iodine and palladium sources--reflecting purchases made, in many cases, at different prices and in different quantities--we calculated a mean purchase price for each radioactive source. This mean purchase price for a particular radioactive source is, in effect, a weighted mean. To reflect the differences among hospitals in purchase prices and purchase volumes, we used both the hospital weights and purchase volume as weighting variables in estimating the mean purchase price. All calculations were done at the individual purchase level but reflect the hospital and purchase volume weighting variables. S x*jhi) N represents the total number of hospitals in the hth stratum; n represents the size of the sample of hospitals in the hth stratum; y*jhi = S yjhik, which represents the total dollar amount for the jth radioactive source listed on the kth invoice for the ith hospital in the hth stratum; and x*jhi = S xjhik, which represents the total number of units for the jth radioactive source listed on the kth invoice for the ith hospital in the hth stratum. The equation estimates the mean purchase price of a radioactive source as the ratio of the total amount purchased in dollars to the total number of units purchased. SS}. To assess the precision of our estimates of the mean purchase price, we calculated coefficients of variation for the estimated mean purchase price. We also used the coefficients of variations as an indicator of price variability across hospitals. We estimated the mean purchase prices, median purchase prices, and the coefficients of variation for the means using specialized software for survey data analysis--SUDAAN®️. In addition to the contact above, Maria Martino, Assistant Director; Shamonda Braithwaite; Melanie Anne Egorin; Hannah Fein; Nora Hoban; Dae Park; Dan Ries; Anna Theisen-Olson; Yorick F. Uzes; and Craig Winslow made contributions to this report.

Generally, in paying for hospital outpatient procedures, Medicare makes prospectively set payments that are intended to cover the costs of all items and services delivered with the procedure. Medicare pays separately for some technologies that are too new to be represented in the claims data used to set rates. It also pays separately for certain technologies that are not new, such as radioactive sources used in brachytherapy, a cancer treatment. The Medicare Prescription Drug, Improvement, and Modernization Act of 2003 required separate payment for the radioactive sources. It also directed GAO to make recommendations regarding future payment. GAO examined (1) how Medicare determines payment amounts for technologies that are not new but are separately paid and (2) how payment amounts for iodine, palladium, and iridium sources used in brachytherapy could be determined. In paying separately for technologies that are not new, the Centers for Medicare & Medicaid Services (CMS) generally sets prospective rates based on the average unit cost of the technologies across hospitals. For example, CMS currently pays separate prospective rates for certain high-cost drugs based on the mean per-unit acquisition cost, as derived by CMS from data provided by drug manufacturers. A prospective rate is desirable because basing a rate on an average encourages those hospitals that provide the technology to minimize their acquisition costs. However, when CMS determines that the unit cost of a technology designated for separate payment varies substantially and unpredictably over time, or that reasonably accurate data are not available, it pays each hospital its cost for the technology. For example, CMS pays each hospital its cost for corneal transplant tissue, because it determined that the fees eye banks charge hospitals vary substantially and unpredictably. GAO's analysis suggests that CMS could set prospective payment rates for iodine and palladium because their unit costs are generally stable and CMS can base the payments on reasonably accurate data. According to interviews GAO conducted with hospitals and manufacturers, iodine and palladium have an identifiable unit cost that does not vary unpredictably over time. In addition, the results of GAO's survey of hospital purchase prices suggest that the unit cost of iodine and palladium does not vary substantially. Furthermore, GAO found that Medicare claims would be a reasonably accurate source of data for setting prospective rates for these sources. GAO was not able to determine a suitable methodology for paying separately for iridium. In contrast with iodine and palladium, which are permanently implanted in patients, iridium is reused across multiple patients, making its unit cost more difficult to determine. Although GAO surveyed hospitals on the unit cost of iridium, it did not receive sufficient data to identify and evaluate an average unit cost across hospitals. However, CMS has outpatient claims data from all hospitals that have used iridium. In order to identify a suitable methodology for determining a separate payment amount, CMS would be able to use these data to establish an average cost and evaluate whether the cost varies substantially and unpredictably.

Since the inception of SBInet, we have reported on a range of issues regarding program design and implementation. For example, in October 2007, we testified that DHS had made some progress in implementing Project 28--the first segment of SBInet technology across the southwest border--but had fallen behind its planned schedule. In our February 2008 testimony, we noted that although DHS accepted Project 28 and was gathering lessons learned from the project, CBP officials responsible for the program said it did not fully meet their expectations and would not be replicated. We also reported issues with the system that remained unresolved. For example, the Border Patrol, a CBP component, reported that as of February 2008, problems remained with the resolution of cameras at distances over 5 kilometers, while expectations had been that the cameras would work at twice that distance. In our September 2008 testimony, we reported that CBP had initially planned to deploy SBInet technology along the southwest border by the end of 2008, but as of February 2008, this date had slipped to 2011 and that SBInet would have fewer capabilities than originally planned. In September 2009, we reported that SBInet technology capabilities had not yet been deployed and delays required the Border Patrol to rely on existing technology for securing the border, rather than using the newer SBInet technology planned to overcome the existing technology's limitations. As of April 2010, SBInet's promised technology capabilities are still not operational and delays continue to require Border Patrol to rely on existing technology for securing the border, rather than using the newer SBInet technology planned to overcome the existing technology's limitations. When CBP initiated SBInet in 2006, it planned to complete SBInet deployment along the entire southwest border in fiscal year 2009, but by February 2009, the completion date had slipped to 2016. The first deployments of SBInet technology projects are to take place along 53 miles in the Tucson border sector, designated as Tus-1 and Ajo-1. As of April 7, 2010, the schedule for Tus-1 and Ajo-1 had slipped from the end of calendar year 2008 as planned in February 2008, and government acceptance of Tus-1 was expected in September 2010 and Ajo-1 in the fourth quarter of calendar year 2010. Limitations in the system's ability to function as intended as well as concerns about the impact of placing towers and access roads in environmentally sensitive locations have contributed to these delays. Examples of these system limitations include continued instability of the cameras and mechanical problems with the radar at the tower, and issues with the sensitivity of the radar. As of January 2010, program officials stated that the program was working to address system limitations, such as modifications to the radar. As a result of the delays, Border Patrol agents continue to use existing technology that has limitations, such as performance shortfalls and maintenance issues. For example, on the southwest border, Border Patrol relies on existing equipment such as cameras mounted on towers that have intermittent problems, including signal loss. Border Patrol has procured and delivered some new technology to fill gaps or augment existing equipment. We have also been mandated to review CBP's SBI expenditure plans, beginning with fiscal year 2007. In doing so, in February 2007, we reported that CBP's initial expenditure plan lacked specificity on such things as planned activities and milestones, anticipated costs, staffing levels, and expected mission outcomes. We noted that this, coupled with the large cost and ambitious time frames, added risk to the program. At that time, we made several recommendations to address these deficiencies. These recommendations included one regarding the need for future expenditure plans to include explicit and measurable commitments relative to the capabilities, schedule, costs, and benefits associated with individual SBI program activities. Although DHS agreed with this recommendation, to date, it has not been fully implemented. In our June 2008 report on the fiscal year 2008 expenditure plan, we recommended that CBP ensure that future expenditure plans include an explicit description of how activities will further the objectives of SBI, as defined in the DHS Secure Border Strategic Plan, and how the plan allocates funding to the highest priority border security needs. DHS concurred with this recommendation and implemented it as part of the fiscal year 2009 expenditure plan. In reviewing the fiscal year 2008 and 2009 expenditure plans, we have reported that, although the plans improved from year to year, providing more detail and higher quality information than the year before; the plans did not fully satisfy all the conditions set out by law. In addition to monitoring program implementation and reviewing expenditure plans, we have also examined acquisition weaknesses that increased the risk that the system would not perform as intended, take longer to deliver than necessary, and cost more than it should. In particular, we reported in September 2008 that important aspects of SBInet were ambiguous and in a continued state of flux, making it unclear and uncertain what technological capabilities were to be delivered and when. Further, we reported at that time that SBInet requirements had not been effectively developed and managed and that testing was not being effectively managed. Accordingly, we concluded that the program was a risky endeavor, and we made a number of recommendations for strengthening the program's chances of success. DHS largely agreed with these recommendations and we have ongoing work that will report on the status of DHS's efforts to implement them. We reported in January 2010 that key aspects of ongoing qualification testing had not been properly planned and executed. For example, while DHS's testing approach appropriately consisted of a series of test events, many of the test plans and procedures were not defined in accordance with relevant guidance, and over 70 percent of the approved test procedures had to be rewritten during execution because the procedures were not adequate. Among these changes were ones that appeared to have been made to pass the test rather than to qualify the system. We also reported at this time that the number of new system defects identified over a 17 month period while testing was underway was generally increasing faster than the number of defects being fixed--a trend that is not indicative of a maturing system that is ready for acceptance and deployment. Compounding this trend was the fact that the full magnitude of this issue was unclear because these defects were not all being assigned priorities based on severity. Accordingly, we made additional recommendations and DHS largely agreed with them and has efforts underway to address them. Most recently, we concluded a review of SBInet that addresses the extent to which DHS has defined the scope of its proposed SBInet solution, demonstrated the cost effectiveness of this solution, developed a reliable schedule for implementing the solution, employed acquisition management disciplines, and addressed the recommendations in our September 2008 report. Although we plan to report on the results of this review later this month, we briefed DHS on our findings in December 2009, and provided DHS with a draft of this report, including conclusions and recommendations in March 2010. Among other things, these recommendations provide a framework for how the program should proceed. In light of program shortcomings, continued delays, questions surrounding SBInet's viability, and the program's high cost vis-a-vis other alternatives, in January 2010, the Secretary of Homeland Security ordered a department assessment of the SBI program. In addition, on March 16, 2010, the Secretary froze fiscal year 2010 funding for any work on SBInet beyond Tus-1 and Ajo-1 until the assessment is completed and the Secretary reallocated $50 million of the American Recovery and Reinvestment Act funds allocated to SBInet to procure alternative tested and commercially available technologies, such as mobile radios, to be used along the border. In March 2010, the SBI Executive Director stated that the department's assessment ordered in January 2010, would consist of a comprehensive and science-based assessment of alternatives intended to determine if there are alternatives to SBInet that may more efficiently, effectively and economically meet U.S. border security needs. According to the SBI Executive Director, if the assessment suggests that the SBInet capabilities are worth the cost, DHS will extend its deployment to sites beyond Tus-1 and Ajo-1. However, if the assessment suggests that alternative technology options represent the best balance of capability and cost-effectiveness, DHS intends to immediately begin redirecting resources currently allocated for border security efforts to these stronger options. As part of our continuing support to the Congress in overseeing the SBI program, we are currently reviewing DHS's expenditure plan for the fiscal year 2010 Border Security Fencing, Infrastructure, and Technology appropriation, which provides funding for the SBI program. Additionally, we are completing a review of the internal control procedures in place to ensure that payments to SBInet's prime contractor were proper and in compliance with selected key contract terms and conditions. Finally, we are reviewing controls for managing and overseeing the SBInet prime contractor, including efforts to monitor the prime contractor's progress in meeting cost and schedule expectations. We expect to report on the results of these reviews later this year. In addition to monitoring SBInet implementation, we also reported on the tactical infrastructure component of the SBI program. For example, in October 2007, we reported that tactical infrastructure deployment along the southwest border was on schedule, but meeting CBP's fencing goal by December 31, 2008, might be challenging and more costly than planned. In September 2008, we also reported that the deployment of fencing was ongoing, but costs were increasing, the life-cycle cost for fencing was not yet known, and finishing the planned number of miles by December 31, 2008 would be challenging. We also reported on continuing cost increases and delays with respect to deploying tactical infrastructure. In September 2009, we reported, among other things, that delays co ntinued in completing planned tactical infrastructure primarily because of challenges in acquiring the necessary property rights from landowners. GAO, Secure Border Initiative: Technology Deployment Delays Persist and the Impact of Border Fencing Has Not Been Assessed. GAO-09-896. (Washington, D.C.: Sept. 9, 2009). of deployment and operations and future maintenance costs for the fence, roads, and lighting, among other things, are estimated at about $6.5 billion. CBP reported that tactical infrastructure, coupled with additional trained agents, had increased the miles of the southwest border under control, but despite a $2.6 billion investment, it cannot account separately for the impact of tactical infrastructure. CBP measures miles of tactical infrastructure constructed and has completed analyses intended to show where fencing is more appropriate than other alternatives, such as more personnel, but these analyses were based primarily on the judgment of senior Border Patrol agents. Leading practices suggest that a program evaluation would complement those efforts. Until CBP determines the contribution of tactical infrastructure to border security, it is not positioned to address the impact of this investment. In our September 2009 report, we recommended that to improve the quality of information available to allocate resources and determine tactical infrastructure's contribution to effective control of the border, the Commissioner of CBP conduct a cost-effective evaluation of the impact of tactical infrastructure on effective control of the border. DHS concurred with our recommendation and described actions recently completed, underway, and planned that it said will address our recommendation. In April 2010, SBI officials told us that the Homeland Security Institute was conducting an analysis of the impact of tactical infrastructure on border security. We believe that this effort would be consistent with our recommendation, further complement performance management initiatives, and be useful to inform resource decision making. This concludes my statement for the record. For further information on this statement, please contact Richard M. Stana 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 statement. In addition to the contact named above, Frances Cook, Katherine Davis, Jeanette Espinola, Dan Gordon, Kaelin Kuhn, Jeremy Manion, Taylor Matheson, Jamelyn Payan, Susan Quinlan, Jonathan Smith, Sushmita Srikanth, and Juan Tapia-Videla made key contributions to this statement. Secure Border Initiative: Testing and Problem Resolution Challenges Put Delivery of Technology Program at Risk. GAO-10-511T. Washington, D.C.: Mar. 18, 2010. Secure Border Initiative: DHS Needs to Address Testing and Performance Limitations that Place Key Technology Program at Risk. GAO-10-158. Washington, D.C.: Jan. 29, 2010. Secure Border Initiative: Technology Deployment Delays Persist and the Impact of Border Fencing Has Not Been Assessed. GAO-09-1013T. Washington, D.C.: Sept. 17, 2009. Secure Border Initiative: Technology Deployment Delays Persist and the Impact of Border Fencing Has Not Been Assessed. GAO-09-896. Washington, D.C.: Sept. 9, 2009. U.S. Customs and Border Protection's Secure Border Initiative Fiscal Year 2009 Expenditure Plan. GAO-09-274R. Washington, D.C.: Apr. 30, 2009. Secure Border Initiative Fence Construction Costs. GAO-09-244R. Washington, D.C.: Jan. 29, 2009. Secure Border Initiative: DHS Needs to Address Significant Risks in Delivering Key Technology Investment. GAO-08-1086. Washington, D.C.: Sept. 22, 2008. Secure Border Initiative: DHS Needs to Address Significant Risks in Delivering Key Technology Investment. GAO-08-1148T. Washington, D.C.: Sept. 10, 2008. Secure Border Initiative: Observations on Deployment Challenges. GAO-08-1141T. Washington, D.C.: Sept. 10, 2008. Secure Border Initiative: Fiscal Year 2008 Expenditure Plan Shows Improvement, but Deficiencies Limit Congressional Oversight and DHS Accountability. GAO-08-739R. Washington, D.C.: June 26, 2008. Department of Homeland Security: Better Planning and Oversight Needed to Improve Complex Service Acquisition Outcomes. GAO-08-765T. Washington, D.C.: May 8, 2008. Department of Homeland Security: Better Planning and Assessment Needed to Improve Outcomes for Complex Service Acquisitions GAO-08-263. Washington, D.C.: Apr. 22, 2008. Secure Border Initiative: Observations on the Importance of Applying Lessons Learned to Future Projects. GAO-08-508T. Washington, D.C.: Feb. 27, 2008. Secure Border Initiative: Observations on Selected Aspects of SBInet Program Implementation. GAO-08-131T. Washington, D.C.: Oct. 24, 2007. Secure Border Initiative: SBInet Planning and Management Improvements Needed to Control Risks. GAO-07-504T. Washington, D.C.: Feb. 27, 2007. Secure Border Initiative: SBInet Expenditure Plan Needs to Better Support Oversight and Accountability. GAO-07-309. Washington, D.C.: Feb. 15, 2007. 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Securing the nation's borders from illegal entry of aliens and contraband, including terrorists and weapons of mass destruction, continues to be a major challenge. In November 2005, the Department of Homeland Security (DHS) announced the launch of the Secure Border Initiative (SBI)--a multiyear, multibillion dollar program aimed at securing U.S. borders and reducing illegal immigration. Within DHS, the U.S. Customs and Border Protection (CBP) provides agents and officers to support SBI. As requested, this statement summarizes (1) the findings and recommendations of GAO's reports on SBI's technology, known as SBInet (including such things as cameras and radars), and DHS's recent actions on SBInet; and (2) the findings and recommendations of GAO's reports on tactical infrastructure, such as fencing, and the extent to which CBP has deployed tactical infrastructure and assessed its operational impact. This statement is based on products issued from 2007 through 2010, with selected updates as of April 2010. To conduct these updates, GAO reviewed program schedules, status reports and funding and interviewed DHS officials. Since the inception of SBInet, GAO has reported on a range of issues regarding design and implementation, including program challenges, management weaknesses, and cost, schedule, and performance risks; DHS has largely concurred with GAO's recommendations and has started to take some action to address them. For example, in October 2007, GAO testified that the project involving the first segment of SBInet technology across the southwest border had fallen behind its planned schedule. In a September 2008 testimony, GAO reported that CBP plans to initially deploy SBInet technology along the southwest border had slipped from the end of 2008 to 2011 and that SBInet would have fewer capabilities than originally planned. As of April 2010, SBInet's promised capabilities were still not operational. Limitations in the system's ability to function have contributed to delays. GAO has also reviewed CBP expenditure plans and found a lack of specificity on such things as planned activities and milestones. GAO made recommendations, including the need for future expenditure plans to include explicit and measurable commitments relative to the capabilities, schedule, costs, and benefits associated with individual SBI program activities. While DHS has concurred with GAO's recommendations, and its expenditure plans have improved from year to year in detail and quality, the plans, including the one for fiscal year 2009, did not fully satisfy the conditions set out by law. Further, in September 2008, GAO made recommendations to address SBInet technological capabilities that were ambiguous or in a state of flux. DHS generally concurred with them. In January 2010, GAO reported that the number of new system defects identified over an 17 month period while testing was underway was generally increasing faster than the number of defects being fixed, not indicative of a maturing system. Given the program's shortcomings, in January 2010, the Secretary of Homeland Security ordered an assessment of the program, and in March 2010, the Secretary froze a portion of the program's fiscal year 2010 funding. GAO plans to report in May 2010 on the SBInet solution and the status of its September 2008 recommendations. CBP has completed deploying most of its planned tactical infrastructure and has begun efforts to measure its impact on border security, in response to a GAO recommendation. As of April 2010, CBP had completed 646 of the 652 miles of fencing it committed to deploy along the southwest border. CBP plans to have the remaining 6 miles of this baseline completed by December 2010. CBP reported that tactical infrastructure, coupled with additional trained agents, had increased the miles of the southwest border under control, but despite a $2.6 billion investment, it cannot account separately for the impact of tactical infrastructure. In a September 2009 report, GAO recommended that to improve the quality of information available to allocate resources and determine tactical infrastructure's contribution to effective control of the border, the Commissioner of CBP conduct a cost-effective evaluation of the impact of tactical infrastructure. DHS concurred with our recommendation and, in April 2010, told GAO that the Homeland Security Institute had undertaken this analysis.

Roughly half of all workers participate in an employer-sponsored retirement, or pension plan. Private sector pension plans are classified as either defined benefit or defined contribution plans. Defined benefit plans promise to provide, generally, a fixed level of monthly retirement income that is based on salary, years of service, and age at retirement regardless of how the plan's investments perform. In contrast, benefits from defined contribution plans are based on the contributions to and the performance of the investments in individual accounts, which may fluctuate in value. Examples of defined contribution plans include 401(k) profit-sharing and thrift-savings plans, stock bonus plans, and annuity plans. Labor's Employee Benefits Security Administration (EBSA) oversees 401(k) plans--including the fees associated with running the plans-- because they are considered employee benefit plans under ERISA. Enacted before 401(k) plans came into wide use, ERISA establishes the responsibilities of employee benefit plan decision makers and the requirements for disclosing and reporting plan fees. Typically, the plan sponsor is a fiduciary. A plan fiduciary includes a person who has discretionary control or authority over the management or administration of the plan, including the plan's assets. ERISA requires that plan sponsors responsible for managing employee benefit plans carry out their responsibilities prudently and do so solely in the interest of the plans' participants and beneficiaries. The law also provides Labor with oversight authority over pension plans. However, the specific investment products commonly contained in pension plans--such as company stock, mutual funds, collective investment funds, and group annuity contracts--fall under the authority of the applicable securities, banking, or insurance regulators: The Securities and Exchange Commission (SEC), among other responsibilities, regulates registered securities including company stock and mutual funds under securities law. The federal agencies charged with oversight of banks--primarily the Federal Reserve Board, the Treasury Department's Office of the Comptroller of the Currency, and the Federal Deposit Insurance Corporation--regulate bank investment products, such as collective investment funds. State agencies generally regulate insurance products, such as variable annuity contracts. Such investment products may also include one or more insurance elements, which are not present in other investment options. Generally, these elements include an annuity feature, interest and expense guarantees, and any death benefit provided during the term of the contract. The number of defined contribution plans has increased since 1985, while the number of defined benefit plans has declined dramatically. Figure 1 shows the growth of defined contribution plans relative to that of defined benefit plans from 1985 to 2005. In 2005, more workers were covered by defined contribution plans than by defined benefit plans. In 1985, defined benefit plans covered approximately 29 million active participants, compared to 33 million active participants in defined contribution plans. By 2005, the difference in the numbers had become more pronounced, with roughly 21 million active participants covered by defined benefit plans and approximately 55 million active participants in defined contribution plans. Figure 2 shows the shift in active participants from defined benefit to defined contribution plans since 1985. With the growth in plans and participants, the majority of private pension plan assets are now held in defined contribution plans. As shown in figure 3, defined benefit plan assets decreased from $2.0 trillion in constant 2006 dollars, or about 66 percent of total private pension assets, in 1985 to $1.5 trillion, or just over 40 percent of the total, in 2005. Similarly, the number of 401(k) plans grew from less than 30,000 in 1985, or less than 7 percent of all defined contribution plans, to an estimated 417,000 plans, or about 95 percent of all defined contribution plans in 2005. During this same time period, the number of active participants in 401(k) plans increased from 10 million to 47 million, and plan assets increased from $270 billion to about $2.5 trillion in constant 2006 dollars. Based on industry estimates, equity funds accounted for nearly half of the 401(k) plan assets at the close of 2005. Equity funds are investment options that invest primarily in stocks, such as mutual funds, bank collective funds, life insurance separate accounts, and certain pooled investment products (see fig. 4). Other plan assets were invested in company stock; stable value funds, including guaranteed investment contracts; balanced funds; bond funds; and money funds. Several of these options can be held in mutual funds, which in total represent about 51 percent of 401(k) plan assets. Common plan features, like the type and number of investment options provided to participants in their 401(k) plans, is a topic being studied under other GAO work on plan sponsor practices requested by this committee. With the growth in 401(k) plans, more workers now bear greater responsibility for funding their retirement income. According to the most recent data from Labor, the majority of 401(k) plans are participant- directed, meaning that a participant makes investment decisions about his or her own retirement plan contributions. In 2003, about 88 percent of all 401(k) plans--covering 93 percent of all active 401(k) plan participants and 92 percent of all 401(k) plan assets--generally allowed participants to choose how much to invest, within federal limits, and to select from a menu of diversified investment options selected by the employer sponsoring the plan. While some participants have account balances of greater than $100,000, most have much smaller balances. Based on industry estimates for 2005, 37 percent of participants had balances of less than $10,000, while 16 percent had balances greater than $100,000. The median account balance was $19,328, while the average account balance was $58,328. Participants' account balances also include any contributions employers make on their behalf. Fees are charged by the various outside companies that the plan sponsor--often the employer offering the 401(k) plan--hires to provide a number of services necessary to operate the plan. Services can include investment management (i.e., selecting and managing the securities included in a mutual fund); consulting and providing financial advice (i.e., selecting vendors for investment options or other services); record keeping (i.e., tracking individual account contributions); custodial or trustee services for plan assets (i.e., holding the plan assets in a bank); and telephone or Web-based customer services for participants. Generally there are two ways to provide services: "bundled" (the sponsor hires one company that provides the full range of services directly or through subcontracts) and "unbundled" (the sponsor uses a combination of service providers). Fees are one of many factors--such as the historical performance and investment risk for each plan option--participants should consider when investing in a 401(k) plan because fees can significantly decrease retirement savings over the course of a career. As participants accrue earnings on their investments, they pay a number of fees, including expenses, commissions, or other charges associated with operating a 401(k) plan. Over the course of the employee's career, for example, a 1 percentage point difference in fees can significantly reduce the amount of money saved for retirement. Figure 5 assumes an employee who is 45 years of age with 20 years until retirement changes employers and leaves $20,000 in a 401(k) account until retirement. If the average annual net return is 6.5 percent--a 7 percent investment return minus a 0.5 percent charge for fees--the $20,000 will grow to about $70,500 at retirement. However, if fees are instead 1.5 percent annually, the average net return is reduced to 5.5 percent, and the $20,000 will grow to only about $58,400. The additional 1 percent annual charge for fees would reduce the account balance at retirement by about 17 percent. Various fees are associated with 401(k) plans, but investment and record- keeping fees account for most 401(k) plan fees. However, inadequate disclosure and reporting requirements may leave participants and Labor without important information on these fees. The information on fees that plan sponsors are required to disclose to participants does not allow participants to easily compare the fees for the investment options in their 401(k) plan. In addition, Labor does not have the information it needs to oversee fees and identify questionable 401(k) business practices. Labor has several initiatives under way to improve the information it has on fees and the various business arrangements among service providers. Investment fees account for the largest portion of total fees regardless of plan size, as figure 6 illustrates. Investment fees are, for example, fees charged by companies that manage a mutual fund for all services related to operating the fund. These fees pay for selecting a mutual fund's portfolio of securities and managing the fund; marketing the fund and compensating brokers who sell the fund; and providing other shareholder services, such as distributing the fund prospectus. Plan record-keeping fees generally constitute the second-largest portion of plan fees. Plan record-keeping fees are usually charged by the service provider to set up and maintain the 401(k) plan. These fees cover activities such as enrolling plan participants, processing participant fund selections, preparing and mailing account statements, and other related administrative activities. Unlike investment fees, plan record-keeping fees apply to the entire 401(k) plan rather than the individual investment options. As shown in figure 7, these fees make up a smaller proportion of total plan fees in larger plans, indicating economies of scale. There are a number of other fees associated with establishing and maintaining a plan, such as fees to communicate basic information about the plan to participants. However, these fees generally constitute a much smaller percentage of total plan fees than investment and plan record- keeping fees. Whether and how participants or plan sponsors pay these fees varies by the type of fee and the size of the 401(k) plan. Investment fees, which are usually charged as a fixed percentage of assets and deducted from investment returns, are typically borne by participants. Plan record- keeping fees are charged as a percentage of a participant's assets, a flat fee, or a combination of both. Although plan sponsors pay these fees in a considerable number of plans, they are increasingly being paid by participants. ERISA requires that plan sponsors provide all participants with a summary plan description, account statements, and the summary annual report, but these documents are not required to disclose information on fees borne by individual participants. Table 1 provides an overview of each of these disclosure documents, and the type of fee information they may contain. ERISA also requires 401(k) plan sponsors that have elected liability protection from participants' investment decisions to provide additional fee information. Most 401(k) plan sponsors elect this protection and therefore must provide, among other information, a description of the investment risk and historical performance of each investment option available in the plan and any associated transaction fees for buying or selling shares in these options. Upon request, these plans must also provide participants with the expense ratio--a fund's operating fees as a percentage of its assets--for each investment option. Plan sponsors may voluntarily provide participants with more information on fees than ERISA requires. For example, plans may distribute prospectuses or fund profiles for individual investment options in the plan. Although not required, plan sponsors may provide record-keeping or other information on fees in participants' account statements. Although participants are responsible for directing their investments in the plan, they may not be aware of the different fees that they pay. In a nationwide survey, more than 80 percent of 401(k) participants report not knowing how much they pay in fees. Some industry professionals said that making participants who direct their investments more aware of fees would help them make more informed investment decisions. Participants may not have a clear picture of the total fees they pay because plan sponsors provide this information in a piecemeal fashion. Some documents that contain fee information are provided to participants automatically, such as annually or within 90 days of joining the plan, while others, such as prospectuses, may require that participants seek them out. Furthermore, the documents that participants receive do not provide a simple way for participants to compare fees among the investment options in their 401(k) plan. Industry professionals suggested that comparing the expense ratio across investment options is the most effective way to compare fees within a 401(k) plan. The expense ratio is useful because it includes investment fees, which account for most of the fees participants pay, and is generally the only fee measure that varies by option. However, as noted above, not all plan sponsors are required to provide expense ratios to participants. Labor has authority under ERISA to oversee 401(k) plan fees and certain types of business arrangements involving service providers, but lacks the information it needs to provide effective oversight. Under ERISA, Labor is responsible for enforcing the requirements that plan sponsors (1) ensure that fees paid with plan assets are reasonable and for necessary services; (2) be prudent and diversify the plan's investments or, if plan sponsors elect liability protection, provide a broad range of investment choices for participants; and (3) report information known on certain business arrangements involving service providers. Labor does this in a number of ways, including collecting some information on fees from plan sponsors, investigating participants' complaints or referrals from other agencies on questionable 401(k) plan practices, and conducting outreach to educate plan sponsors about their responsibilities. However, the information plan sponsors are required to report to Labor is limited, and the lack of information hinders the agency's ability to effectively oversee fees. Many of the fees are associated with the individual investment options in the 401(k) plan, such as a mutual fund; they are deducted from investment returns and not included on the annual reporting form plan sponsors submit to Labor, Form 5500. As a result, the Form 5500 does not include the largest type of fee, even though plan sponsors receive this information from the mutual fund companies in the form of a prospectus. In 2004, the ERISA Advisory Council concluded that Form 5500s are of little use to policy makers, government enforcement personnel, and participants in terms of understanding the cost of a plan and recommended that Labor modify the form and its accompanying schedules so that all fees incurred directly or indirectly can be reported or estimated. Without information on all fees, Labor's oversight is limited because it is unable to identify fees that may be questionable. Labor and plan sponsors also may not have information on arrangements among service providers that could steer plan sponsors toward offering investment options that benefit service providers but may not be in the best interest of participants. For example, the SEC released a report in May 2005 that raised questions about whether some pension consultants are fully disclosing potential conflicts of interest that may affect the objectivity of the advice. Plan sponsors pay pension consultants to give them advice on matters such as selecting investment options for the plan and monitoring their performance and selecting other service providers, such as custodians, administrators, and broker-dealers. The report highlighted concerns that these arrangements may provide incentives for pension consultants to recommend certain mutual funds to a 401(k) plan sponsor and create conflicts of interest that are not adequately disclosed to plan sponsors. Plan sponsors may not be aware of these arrangements and thus could select mutual funds recommended by the pension consultant over lower-cost alternatives. As a result, participants may have more limited investment options and may pay higher fees for these options than they otherwise would. In addition, specific fees that are considered to be "hidden" may mask the existence of a conflict of interest. Hidden fees are usually related to business arrangements where one service provider to a 401(k) plan pays a third-party provider for services, such as record keeping, but does not disclose this compensation to the plan sponsor. For example, a mutual fund normally provides record-keeping services for its retail investors, i.e., those who invest outside of a 401(k) plan. The same mutual fund, when associated with a plan, might compensate the plan's record keeper for performing the services that it would otherwise perform, such as maintaining individual participants' account records and consolidating their requests to buy or sell shares. The problem with hidden fees is not how much is being paid to the service provider, but with knowing what entity is receiving the compensation and whether or not the compensation fairly represents the value of the service being rendered. Labor's position is that plan sponsors must know about these fees in order to fulfill their fiduciary responsibilities. However, if the plan sponsors do not know that a third party is receiving these fees, they cannot monitor them, evaluate the worthiness of the compensation in view of services rendered, and take action as needed. Labor officials told us about three initiatives currently under way to improve the disclosure of fee information by plan sponsors to participants and to avoid conflicts of interest: Labor is considering promulgating a rule regarding the fee information required to be furnished to participants in plans where sponsors have elected liability protection. According to Labor officials, they are attempting to define the critical information on fees that plan sponsors should provide to participants and what format would enable participants to easily compare the fees across the plan's various investment options. Labor has proposed changes to the Form 5500 Schedule A and Schedule C to improve reporting of fees. Labor proposed to add a check box on Schedule A to improve the disclosure of insurance fees and commissions and identify insurers who fail to supply information to plan sponsors. According to a 2004 ERISA Advisory Council report, many employers have difficulty obtaining timely Schedule A information from insurers. Consistent with recommendations made by the ERISA Advisory Council Working Groups and GAO, Labor proposed changes to the Schedule C to clarify that the plan sponsor must report any direct and indirect compensation (i.e., money or anything else of value) it pays to a service provider during the plan year. Plan sponsors also would be required to disclose the source and nature of compensation in excess of $1,000 that certain key service providers, including, among others, investment managers, consultants, brokers, and trustees as well as all other fiduciaries, receive from parties other than the plan or the plan sponsor, such as record keepers. Labor officials told us that the revision aims to improve the information plan sponsors receive from service providers. The officials acknowledge, however, that this requirement may be difficult for plan sponsors to fulfill without an explicit requirement in ERISA for service providers to give plan sponsors information on the fees they pay to other providers. The third initiative involves amending Labor's regulations under section 408(b)(2) of ERISA to define the information plan sponsors need in deciding whether to select or retain a service provider. According to Labor, plan sponsors need information to assess the reasonableness of the fees being paid by the plan for services rendered and to assess potential conflicts of interest that might affect the objectivity with which the service provider provides its services to the plan. This change to the regulation would be intended to make clear what plan sponsors need to know and, accordingly, what service providers need to provide to plan sponsors. To ensure that participants have a tool to make informed comparisons and decisions among plan investment options, we recommended in our previous report that Congress consider amending ERISA to require all sponsors of participant-directed plans to disclose fee information of 401(k) investment options to participants in a way that facilitates comparison among the options. To better enable the agency to effectively oversee 401(k) plan fees, we recommended that the Secretary of Labor should require plan sponsors to report a summary of all fees that are paid out of plan assets or by participants. To allow plan sponsors, and ultimately Labor, to provide better oversight of fees and certain business arrangements among service providers, we also recommended that Congress should consider amending ERISA to explicitly require that 401(k) service providers disclose to plan sponsors the compensation that providers receive from other service providers. In response to our draft report, Labor generally agreed with our findings and conclusions. Specifically, Labor stated that it will give careful consideration to GAO's recommendation that plans be required to provide a summary of all fees that are paid out of plan assets or by participants. Labor and SEC also provided technical comments on the draft, which we incorporated as appropriate. The pension plan universe has changed: 401(k) plans have emerged to cover most plan participants and the majority of plan assets. With this shift, participants now bear more responsibility for ensuring they have adequate income in retirement, emphasizing the importance of having sufficient information to make informed 401(k) investment decisions. Information about investment options' historical performance is useful, but alone is not enough. Thus, giving participants key information on fees for each of the plan's investment options in a simple format--including fees, historical performance, and risk--will help participants make informed investment decisions within their 401(k) plan. In choosing between investment options with similar performance and risk profiles but different fee structures, the additional provision of expense ratio data may help participants build their retirement savings over time by avoiding investments with relatively high fees. Regulators, too, will need to have better information to provide more effective oversight, especially of the fees associated with 401(k) plans. Amending ERISA and updating regulations to better reflect the impact of fees and undisclosed business arrangements among service providers will help put Labor in a better position to oversee 401(k) plan fees. Furthermore, requiring plan sponsors to report more complete information to Labor on fees--those paid out of plan assets or by participants--would put the agency in a better position to effectively oversee 401(k) plans. For further information regarding this testimony, please contact Barbara D. Bovbjerg, Director, or Tamara Cross, Assistant Director, Education, Workforce, and Income Security Issues at (202) 512-7215 or [email protected]. Individuals making key contributions to this testimony include Daniel Alspaugh, Monika Gomez, Michael P. Morris, Rachael Valliere, Walter Vance, and Craig H. Winslow. 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.

Over the past two decades there has been a noticeable shift in the types of plans employers are offering employees. Employers are increasingly moving away from traditional defined benefit plans to what has become the most dominant and fastest growing type of defined contribution plan, the 401(k). As more workers participate in 401(k) plans, they bear more of the responsibility for funding their retirement. Given the choices facing participants, specific information about the plan and plan options becomes more relevant than under defined benefit plans because participants are responsible for ensuring that they have adequate income at retirement. While information on historical performance and investment risk for each plan option are important for participants to understand, so too is information on fees because fees can significantly decrease participants' retirement savings over the course of a career. As a result of employees bearing more responsibility for funding their retirement under 401(k) plans, Congress asked us to talk about the prevalence of 401(k) plans today and to summarize our recent work on providing better information to 401(k) participants and the Department of Labor (Labor) on fees. GAO's remarks today will focus on (1) trends in the use of 401(k) plans, and (2) the types of fees associated with these plans. There are an increasing number of active participants in 401(k) plans than in other types of employer-sponsored pension plans, a trend that has accelerated since the 1980s. Now, 401(k) plans represent the majority of all private pension plans; they also service the most participants and hold the most assets. These plans offer a range of investment options, but equity funds--those that invest primarily in stocks--accounted for nearly half of 401(k) assets at the close of 2005. Most 401(k) plans are participant-directed, meaning that a participant is responsible for making the investment decisions about his or her own retirement plan contributions. Inadequate disclosure and reporting requirements may leave participants without a simple way to compare fees among plan investment options, and Labor without the information it needs to oversee fees and identify questionable 401(k) business practices. The Employee Retirement Income Security Act (ERISA) of 1974 requires 401(k) plan sponsors to disclose only limited information on fees. Participants must collect various documents over time and may be required to seek out some documents in order to get a clear picture of the total fees that they pay. Furthermore, the documents that participants receive do not provide a simple way to compare fees--along with risk and historical performance--among the investment options in their 401(k) plan. The information reported to Labor does not identify all fees charged to 401(k) plans and therefore has limited use for effectively overseeing fees and identifying undisclosed business arrangements among consultants or service providers. As a result, participants may have more limited investment options and pay higher fees for these options than they otherwise would.

Over the last decade, the use of federal service contracting has increased and now accounts for over 60 percent of federal procurement dollars spent annually. A performance-based approach to federal service contracting was introduced during the 1990s, representing a shift from specifying the way in which contractors should perform work to specifying acquisition outcomes. Regardless of the contracting method, focusing on outcomes and collaboration among multiple stakeholders in the contracting process has been acknowledged as sound contract management. In 2000, federal procurement law established a performance- based approach as the preferred acquisition method for services. The Federal Acquisition Regulation requires all performance-based service acquisitions to include a performance work statement that describes outcome-oriented requirements in terms of results required rather than the methods of performance of the work; measurable performance standards describing how to measure contractor performance in terms of quality, timeliness, and quantity; and the method of assessing contract performance against performance standards, commonly accomplished through the use of a quality assurance surveillance plan. A 1998 Office of Federal Procurement Policy (OFPP) study on performance-based contracts--based largely on contracts for basic services, such as janitorial or maintenance services--showed that a number of anticipated benefits had been achieved, including reduced acquisition costs, increased competition for contracts, and improved contractor performance. However, implementing a performance-based approach is often more difficult for complex acquisitions, such as information technology, than it is for basic services, because agencies begin with requirements that are less stable, making it difficult to establish measurable outcomes. Such complex acquisitions may need to have requirements and performance standards continually refined throughout the life-cycle of the acquisition for a contractor to deliver a valuable service over an extended period of time. OFPP also has noted in policy that certain types of services, such as research and development, may not lend themselves to outcome-oriented requirements. To encourage agencies to apply a performance-based approach to service acquisitions, the Office of Management and Budget (OMB) established governmentwide performance targets, which increased to 50 percent of eligible service contract dollars for the current fiscal year. In January 2007, the congressionally mandated Acquisition Advisory Panel reported that performance-based acquisition has not been fully implemented in the federal government, despite OMB encouragement, and recommended that OMB adjust the governmentwide target to reflect individual agency assessments and plans. In May 2007, OMB's OFPP issued a memo providing that agencies, at a minimum, were expected to meet targets established and report on them in their management plans. In response, DHS's CPO established a performance-based target of 25 percent for fiscal year 2007, increasing to 40 percent by fiscal year 2010, that was included in DHS's Performance-Based Management Plan. The Acquisition Advisory Panel also recommended that OFPP issue more explicit implementation guidance and create an "Opportunity Assessment" tool to help agencies identify when they should consider using this acquisition method. Our work has found that performance-based acquisitions must be appropriately planned and structured to minimize the risk of the government receiving services that are over cost estimates, delivered late, and of unacceptable quality. Specifically, we have emphasized the importance of clearly defined requirements to achieving desired results and measurable performance standards to ensuring control and accountability. Prior GAO and DHS Inspector General reviews of complex DHS investments using a performance-based approach point to a number of shortcomings. For example, in June 2007, we reported that a performance-based contract for a DHS financial management system, eMerge2, lacked clear and complete requirements, which led to schedule delays and unacceptable contractor performance. Ultimately, the program was terminated after a $52 million investment. In March 2007, we similarly reported that the Coast Guard's performance-based contract for replacing or modernizing its fleet of vessels and aircraft, Deepwater, had requirements that were set at unrealistic levels and were frequently changed. This resulted in cost escalation, schedule delays, and reduced contractor accountability. The DHS Inspector General has also indicated numerous opportunities for DHS to make better use of sound practices, such as well-defined requirements. Consistent with our prior work, definition of requirements and performance standards influenced outcomes for the eight complex investments we reviewed. In using a performance-based approach, sound contracting practices dictate that required contract outcomes or requirements be well-defined, providing clear descriptions of results to be achieved. While all eight contracts for these investments had outcome- oriented requirements, the requirements were not always well-defined. Further, contracts for half of the investments did not have a complete set of measurable performance standards. Appendix I provides a summary of our analysis of the requirements, performance standards, and outcomes for the eight performance-based contracts for major investments we reviewed. Complex investments with contracts that did not have well-defined requirements or complete measurable performance standards at the time of contract award or start of work experienced either cost overruns, schedule delays, or did not otherwise meet performance expectations. For example, contracts for systems development for two CBP major investments lacked both well-defined requirements and measurable performance standards prior to the start of work and both experienced poor outcomes. The first, for DHS's Automated Commercial Environment (ACE) Task Order 23 project--a trade software modernization effort--was originally estimated to cost $52.7 million over a period of approximately 17 months. However, the program lacked stable requirements at contract award and, therefore, could not establish measurable performance standards and valid cost or schedule baselines for assessing contractor performance. Software requirements were added after contract award, contributing to a project cost increase of approximately $21.1 million, or 40 percent, over the original estimate. Because some portions of the work were delayed to better define requirements, the project is not expected to be completed until June 2009--about 26 months later than planned. The second, Project 28 for systems development for CBP's Secure Border Initiative (SBInet)--a project to help secure a section of the United States- Mexico border using a surveillance system--did not meet expected outcomes due to a lack of both well-defined requirements and measurable performance standards. CBP awarded the Project 28 contract planned as SBInet's proof of concept and the first increment of the fielded SBInet system before the overall SBInet operational requirements and system specifications were finalized. More than 3 months after Project 28 was awarded, DHS's Inspector General reported that CBP had not properly defined SBInet's operational requirements and needed to do so quickly to avoid rework of the contractor's systems engineering. We found that several performance standards were not clearly defined to isolate the contractor's performance from that of CBP employees, making it difficult to determine whether any problems were due to the contractor's system design, CBP employees, or both. As a result, it was not clear how CBP intended to measure compliance with the Project 28 standard for probability of detecting persons attempting to illegally cross the border. Although it did not fully meet user needs and its design will not be used as a basis for future SBInet development, DHS fully accepted the project after an 8-month delay. In addition, DHS officials have stated that much of the Project 28 system will be replaced by new equipment and software. Conversely, we found that contracts with well-defined requirements linked to measurable performance standards delivered results within budget and provided quality service. For example, contracted security services at the San Francisco International Airport for TSA's Screening Partnership Program had well-defined requirements, and all measurable performance standards corresponded to contract requirements--an improvement from our prior reviews of the program. The requirements for gate, checkpoint, and baggage screening services clearly stated that the contractor should use technology and staff to prevent prohibited items from entering sterile areas of the airport and should work to minimize customer complaints while addressing in a timely manner any complaints received. The performance standards assessed how often screeners could successfully detect test images of prohibited items in checked baggage; the percentage of audited records and inspected equipment, property, and materials that were well-kept, operational, and recorded on maintenance logs; and whether all new hires received the required training before assuming their screening responsibilities. In terms of expected outcomes, the contractor achieved a 2.2 percent cost underrun during the first 5 months of the contract and exceeded most requirements. In managing its service acquisitions, including those that are performance- based, DHS has faced oversight challenges, including a lack of reliable data and systematic management reviews. DHS contracting and program representatives told us that they use a performance-based approach to the maximum extent practicable. However, DHS does not have reliable data-- either from the Federal Procurement Data System-Next Generation (FPDS-NG), the governmentwide database for procurement spending, or at a departmentwide level--to systematically monitor or evaluate or report on service acquisitions, including those that are performance-based. Reliable data are essential to overseeing and assessing the implementation of contracting approaches, acquisition outcomes, and making informed management decisions. Moreover, the Chief Procurement Officer (CPO), who has responsibility for departmentwide procurement oversight, has begun some initial review of performance-based service acquisitions, but has not conducted systematic management assessments of this acquisition method. Our analysis of information provided by contracting representatives at the Coast Guard, CBP, Immigration and Customs Enforcement (ICE), and TSA showed that about 51 percent of the 138 contracts we identified in FPDS- NG as performance-based had none of the required performance-based elements: a performance work statement, measurable performance standards, and a method of assessing contractor performance against performance standards. Only 42 of the 138 contracts, or 30 percent, had all of the elements, and about 18 percent had some but not all of the required performance-based acquisition elements (see table 1). Lacking reliable FPDS-NG data, reports on the use of performance-based contracts for eligible service obligations are likely inaccurate. Data reported on the use of performance-based contracts by service types-- ranging from basic, such as janitorial and landscaping, to complex, such as information technology or systems development--requested by OFPP in July 2006--are also likely misleading. The Acquisition Advisory Panel and DHS's CPO also have raised concerns regarding the accuracy of the performance-based designation in FPDS-NG. The Acquisition Advisory Panel's 2007 report noted from its review at 10 federal agencies that 42 percent of the performance-based contracts the panel reviewed had been incorrectly coded. Inaccurate federal procurement data is a long-standing governmentwide concern. Our prior work and the work of the General Services Administration's Inspector General have noted issues with the accuracy and completeness of FPDS and FPDS-NG data. OMB has stressed the importance of submitting timely and accurate procurement data to FPDS- NG and issued memos on this topic in August 2004 and March 2007. Accurate FPDS-NG data could facilitate the CPO's departmentwide oversight of service acquisitions, including those that are performance- based. At a departmentwide level, CPO representatives responsible for procurement oversight indicated that they have not conducted systematic assessments including costs, benefits, and other outcomes of a performance-based approach. To improve the implementation of performance-based acquisitions, CPO representatives established a work group in May 2006 to leverage knowledge among DHS components. They also noted that they are working with OFPP to develop a best practices guide on measurable performance standards and to gather good examples of performance-based contracts. In addition, the CPO has implemented a departmentwide acquisition oversight program, which was designed with the flexibility to address specific procurement issues, such as performance-based service acquisitions, and is based on a series of component-level reviews. Some initial review of performance-based acquisitions has begun under this program, but management assessment or evaluation of the outcomes of this acquisition method has not been conducted. Consistent with federal procurement policy, DHS has emphasized a performance-based approach to improve service acquisition outcomes. However, in keeping with our prior findings, DHS's designation of a service acquisition as performance-based was not as relevant as the underlying contract conditions. Sound acquisition practices, such as clearly defining requirements and establishing complementary measurable performance standards, are hallmarks of successful service acquisitions. In the cases we reviewed as well as in prior findings where these key elements were lacking, DHS did not always achieve successful acquisition outcomes. The report we are releasing today recommends that the Secretary of Homeland Security take several actions to increase DHS's ability to achieve improved outcomes for its service acquisitions, including those that are performance-based. These actions include routinely assessing requirements for complex investments to ensure that they are well-defined and developing consistently measurable standards linked to those requirements; systematically evaluating outcomes of major investments and relevant contracting methods; and improving the quality of FPDS-NG data to facilitate identifying and assessing the use of various contracting methods. DHS generally concurred with our recommendations, noting some departmental initiatives under way to improve acquisition management. However, the department's response did not address how the CPO's process and organizational changes at the departmental level will impact component-level management and assessment of complex acquisitions to improve outcomes. Improving acquisition management has been an ongoing challenge since the department was established and requires sustained management attention. Mr. Chairman, this concludes my prepared statement. I would be pleased to respond to any questions that you or other members of the committee may have at this time. For further information about this statement, please contact John P. Hutton 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 statement. Staff making key contributions to this statement were Amelia Shachoy, Assistant Director; Jeffrey Hartnett; Sean Seales; Karen Sloan; and Don Springman. Contractor submitted all required documentation on time; met project management quality standards; and maintained electronic archiving and restoration standards. Trade systems software development (task order 23) Costs increased by 40 percent ($21.1 million). More than a year behind schedule; unplanned software redesign. Costs increased by 53 percent ($24 million). Maintenance wait times were longer than planned. DHS rejected initial acceptance of Project 28. The project was delayed 8 months with final acceptance in February 2008. DHS noted that the contractor met the requirements, but the project did not fully meet DHS's needs and the technology will not be replicated in future SBInet development. Contractor exceeded the performance standard for machine downtime with a score 1 hour less than required and operated at cost through the second quarter of fiscal year 2007. Contractor exceeded most performance standards; for example, threat detection performance and false alarm rates exceeded the quality standards. Contractor had cost underrun of 2.2 percent ($677,000). Initial contractor planning reports were inadequate; system experienced operational downtime; surveillance reports identified poor contractor performance. Contractor generally met time frames and delivered within budget. Outcomes not available at the time of our review. Legend: contract met or mostly met the criteria; contract partially met the criteria; contract did not meet the criteria. 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 Department of Homeland Security (DHS) has relied on service acquisitions to meet its expansive mission. In fiscal year 2006, DHS spent $12.7 billion to procure services. To improve service acquisition outcomes, federal procurement policy establishes a preference for a performance-based approach, which focuses on developing measurable outcomes rather than prescribing how contractors should perform services. This testimony focuses on how contract outcomes are influenced by how well DHS components have defined and developed contract requirements and performance standards, as well as the need for improved assessment and oversight to ensure better acquisition outcomes. GAO's statement is based on its report being released today, which reviewed judgmentally selected contracts for eight major investments at three DHS components--the Coast Guard, Customs and Border Protection (CBP), and the Transportation Security Administration (TSA)-- totaling $1.53 billion in fiscal years 2005 and 2006; prior GAO and DHS Inspector General reviews; management documents and plans; and related data, including 138 additional contracts, primarily for basic services from the Coast Guard, CBP, TSA, and Immigration and Customs Enforcement. Over the past several years, GAO has found that appropriate planning, structuring, and monitoring of agency service acquisitions, including those that are performance-based, can help minimize the risk of cost overruns, delayed delivery, and unacceptably quality. Several prior GAO and DHS Inspector General reviews of major DHS investments using a performance-based approach point to such shortcomings. While all of the contracts GAO reviewed at the Coast Guard, CBP, and TSA had outcome-oriented requirements, contracts for four of the eight investments did not have well-defined requirements, or a complete set of measurable performance standards, or both at the time of contract award or start of work. These service contracts experienced cost overruns, schedule delays, or did not otherwise meet performance expectations. In contrast, contracts for the other four investments had well-defined requirements linked to measurable performance standards and met the standards for contracts that had begun work. In managing its service acquisitions, including those that are performance-based, DHS has faced oversight challenges that have limited its visibility over service acquisitions and its ability to make informed acquisition management decisions. Notably, the department lacks reliable data on performance-based service acquisitions. About half of the 138 contracts identified by DHS as performance-based had none of the elements DHS requires for such contracts: a performance work statement, measurable performance standards, or a quality assurance surveillance plan. Such inaccurate data limit DHS's ability to perform management assessments of these acquisitions. In addition, the Chief Procurement Officer, who is responsible for departmentwide procurement oversight, has not conducted management assessments of performance-based service acquisitions. To help DHS improve outcomes for its service acquisitions, including those that are performance-based, GAO recommended that DHS routinely assess requirements for complex investments to ensure that they are well-defined, and develop consistently measurable performance standards linked to those requirements. GAO also recommended that DHS systematically evaluate the outcomes of major investments and relevant contracting methods and improve the quality of data to facilitate identifying and assessing the use of various contracting methods. DHS generally concurred with GAO's recommendations, noting some departmental initiatives to improve acquisition management.

Funding for transit projects comes from public funds allocated by federal, state, and local governments and system-generated revenues earned by transit agencies from providing transit services. The Department of Transportation reported: (1) that in 2008, federal funds were nearly 40 percent of total transit agency capital expenditures; (2) that state funds provided approximately 12 percent; and (3) that local funds provided the remaining 48 percent of total transit agency capital expenditures. Our November 2012 report found similar funding trends. Specifically, local funding exceeded total federal funding for the 25 projects approved for federal New Starts grants--part of FTA's Capital Investment Grant Program--from October 2004 through June 2012.important part of this picture, and according to FTA, MAP-21 authorized federal funding for public transit--$10.6 billion for fiscal year 2013 and $10.7 billion for fiscal year 2014. However, while state and localities face their own funding challenges, MAP-21 did not address long-term transportation federal funding challenges. Federal funds available for the FTA's transit programs come from two sources: (1) the general fund of the U.S. treasury and (2) the Mass Transit Account of the Highway Trust Fund. Both of these sources of federal funding face difficulties. Currently, congressional budget discussions raise issues about general fund federal spending. This affects transit programs, such as the Capital Investment Grant Program, which are funded through annual appropriations from the general fund. In addition, the Highway Trust Fund authorizes funds for transit programs primarily through statutory formulas, and there are concerns over the fund's decreasing revenue. The primary mechanism for funding federal highway and transit for more than 50 years is the Highway Trust Fund, which is funded through motor fuel and other highway use taxes. These taxes were established to make the federal-aid highway program self- financing--that is, paid for by the highway users who directly benefit from the program. For many years, user fees in the form of federal fuel taxes and taxes on commercial trucks provided sufficient revenues to the Highway Trust Fund; however, revenues into the fund have eroded over time, in part because federal fuel tax rates have not increased since 1993 and in part because of improvements in vehicle fuel efficiency. In May 2013, the Congressional Budget Office estimated that to maintain current spending levels plus inflation between 2015 and 2022, the Highway Trust Fund will require over $132 billion more than it is expected to take in over that period. About $35 billion of that deficit would be in the transit account. To maintain current spending levels and cover revenue shortfalls, Congress has transferred more than $50 billion in general revenues to the Highway Trust Fund since fiscal year 2008. This approach has effectively broken the link between taxes paid and benefits received by users and may not be sustainable given competing demands and the federal government's growing fiscal challenge. As we have previously reported, this trend will continue in the years ahead as more fuel efficient and alternative fuel vehicles take to the roads. We have previously concluded that a sustainable solution to funding surface transportation is based on balancing revenues to and spending from the Highway Trust Fund. Ultimately, major changes in transportation revenues, spending, or both will be needed to bring the two into balance. For this and other reasons, and because MAP-21 did not address these issues, funding surface transportation remains on GAO's High-Risk List. Our recent work describes how sound capital-investment decisions can help transit agencies use federal and other transit funds more efficiently, and MAP-21's new requirements for transit agencies to use asset management are consistent with our recent findings. Improved transit asset management is important because of (1) the large backlog of transit assets--such as buses, rail cars, elevators, and escalators--that are already beyond their useful lives; (2) increasing demand for transit services; and (3) financial strains on transit providers due to rising fuel prices, decreased state and local funding, and likely limitations of federal funding going forward. According to FTA, roughly $78 billion (in 2009 dollars) would be necessary to cover the costs of rehabilitating or replacing the nation's transit assets and bring them to a state of good repair. Sound asset-management practices can help agencies prioritize their capital investments to help optimize limited funding. We reviewed agencies by conducting site visits and interviews, examining documents, and consulting relevant literature. We selected agencies for review in two ways: 1) using a selection process for transit-agency site visits, and 2) reviewing transit agency case studies included in two key reports we identified through a comprehensive literature review. decisions. Transit agencies that measure and quantify the effects of their capital-investment decisions are likely to make a stronger case for additional funding from state and local decision-makers. However, of the nine transit agencies we visited, only two measured the effects of capital investments on the condition of certain transit assets and none of the agencies measured the effects on future ridership, in part because they lacked the tools to determine these effects. Figure 1 below shows the extent to which selected transit agencies measured the effect of capital investments. Accordingly, we recommended that the Administrator of FTA conduct additional research to help transit agencies measure the effects of capital investments, including future ridership effects. The FTA concurs with this recommendation, in part. FTA agrees that more research to identify the operational impacts of not addressing the state of good repair backlog will support better asset management by transit agencies. However, according to FTA officials, given the agency's current budget situation, it is difficult for it to commit to conduct additional research in the near future. FTA has almost $10 million in research projects on transit asset management underway. MAP-21 directed FTA to provide transit agencies with tools and guidance they need to help them better prioritize capital investment decisions. MAP-21 also directed FTA to develop asset management requirements for all recipients of federal transit program funds, including a transit asset management plan, which must include at a minimum, capital asset inventories, condition assessments, and investment priorities. Since the enactment of MAP-21, FTA has been developing guidance to help transit agencies implement leading practices in transit asset management and a decision support tool to prioritize investments. FTA also issued an advance notice of proposed rulemaking (ANPRM) in October 2013 and requested that comments be submitted to them by January 2, 2014. The ANPRM states that FTA is seeking to ensure public transportation systems are in a state of good repair and transit agencies provide increased transparency into their budgetary decision-making process. FTA is seeking public comment on, among other things, (1) proposals it is considering and (2) questions regarding the following: the requirements of a National Transit Asset Management System, including four options for defining and measuring state of good repair, and the relationship between safety, transit asset management, and state of good repair. As FTA completes its analysis of these comments and further develops a National Transit Asset Management System, transit agencies may be better equipped to implement current leading practices in transit asset management and comply with future transit asset management requirements envisioned by MAP-21. In addition to maintaining transit agencies' existing assets in a state of good repair, some transit agencies also face a need to build and expand their systems to meet demand. To meet these needs in a financially constrained environment, transit agencies can apply for capital funding available from the federal government through the Capital Investment Grant Program, which includes New and Small Starts grants. In many cases, transit agencies have taken advantage of this federal funding to develop bus rapid transit (BRT) projects, which often require less capital investment than other transit modes. For example, New York implemented a BRT project for the M15 line. This BRT line provides critical transportation service in Manhattan for over 55,000 riders a day, connecting many neighborhoods that are a long walk from the nearest subway station. Thus transit agencies are able to meet transit demand with BRT projects with a lower initial capital investment than other modes of transit, like heavy rail. Specifically, we found in our 2012 report that median costs for the 30 BRT and 25 rail transit projects we examined from fiscal year 2005 through February 2012 were about $36.1 million and $575.7 million, respectively. Pub. L. No. 109-59, 119 Stat. 1144 (Aug. 10, 2005). projects. According to all of the five BRT project sponsors we spoke with during our work, even at a lower capital cost, BRT could provide rail-like benefits. For example, Cleveland RTA officials told us the Healthline BRT project cost roughly one-third ($200 million) of what a comparable light- rail project would have cost. Similarly, Eugene, Oregon, Lane Transit District (LTD) officials told us that the agency pursued BRT when it became apparent that light rail was unaffordable and that an LTD light rail project would not be competitive in the New Starts federal grant process. In terms of benefits, these projects--and most other BRT project we examined--increased ridership and improved travel times over the previous bus service. As a result of the lower initial capital costs for BRT along with the benefits of improved service, transit agencies took advantage of federal New and Small Starts dollars to invest in a relatively large number of BRT projects, as compared to other modes of transit. (See fig. 2). In addition, we found that although many factors contribute to economic development, most local officials in the five case study locations we visited believed that BRT projects were contributing to localized economic development. For instance, officials in Cleveland told us that an estimated $4 to $5 billion had been invested near the Healthline BRT project-- associated with major hospitals and universities in the corridor. While most local officials believed that rail transit had a greater economic development potential than BRT, they agreed that certain factors can enhance BRT's ability to contribute to economic development, including physical BRT features that relay a sense of permanence to developers; key employment and activity centers located along the corridor; and local policies and incentives that encourage transit-oriented development. Our analysis of land value changes near BRT lines at our five case study locations lends support to these themes. MAP-21 included a few changes that affected BRT. For example, MAP-21 defined BRT more narrowly and specifically than SAFETEA-LU. Specifically, MAP-21 required that BRT projects include features that emulate the services provided by rail, including defined stations rather than bus stops. This is consistent with our work, as we found that including rail-like features appears to lead to increased economic development along BRT corridors. In addition, MAP-21 made a distinction between BRT projects that are eligible for New Starts versus Small Starts funding. Effective federal coordination can help maximize limited resources, while still providing essential services--especially to transportation- disadvantaged populations, including those who cannot provide their own transportation or may face challenges in accessing public transportation due to age, disability, or income constraints. We have previously reported that transportation-disadvantaged populations often benefit from greater and higher quality services when transportation providers coordinate their operations. Additionally, as we reported in our findings on duplicative efforts and programs, improved coordination of these programs and transportation services has the potential to improve the quality and cost- effectiveness of these services, while also reducing duplication, overlap, and fragmentation of services. However, effective coordination can be challenging, as federal programs provide funding under a variety of services, including education, employment, and medical and other human services. Our 2012 report on transportation-disadvantaged populations found that 80 federal programs in eight different agencies fund a variety of transportation services. While some federally funded programs are transportation focused, transportation was not the primary mission for the vast majority of the programs we identified. For example, the Department of Health and Human Services' Medicaid program reimburses states that provide Medicaid beneficiaries with bus passes, among other transportation options, to access eligible medical services. Total federal spending on services for transportation-disadvantaged populations remains unknown because federal departments did not separately track spending for roughly two-thirds of the programs we identified. Our June 2012 report also concluded that insufficient federal leadership and lack of guidance for furthering collaborative efforts might hinder the coordination of transportation services among state and local providers. Officials in each of the five states we selected for interviews said that the federal government could provide state and local entities with improved guidance on transportation coordination--especially related to instructions on how to share costs across programs (i.e., determining what portion of a trip should be paid by whom). To promote and enhance federal, state, and local coordination efforts, we recommended in 2012 that the Secretary of Transportation, as the chair of the Interagency Coordinating Council on Access and Mobility (Coordinating Council), along with the Coordinating Council's member agencies, should meet and complete and publish a strategic plan outlining agency roles and responsibilities and articulate a strategy to help strengthen interagency collaboration and communication. Also, the Coordinating Council should report on the progress of its prior recommendations and develop a plan to address any outstanding recommendations. DOT agreed to consider our recommendation and the Coordinating Council's member agencies responded by issuing a strategic plan for 2011-2013, which established agency roles and responsibilities and identified a shared strategy to reinforce cooperation, and officials have indicated they will continue to take steps to implement our recommendations. FTA has made some progress in enhancing coordination for transportation-disadvantaged populations. According to FTA officials, as a result of MAP-21, the agency has been updating program guidance and has issued draft program circulars for its Urbanized Area Formula Program, Enhanced Mobility for Seniors and Individuals with Disabilities Program, and the Rural Areas Formula Program, all of which discuss coordinated transit programs, among other issues. In addition, FTA continues to support federal programs that play an important role in helping transportation-disadvantaged populations by providing funds to state and local grantees that, in turn, offer services either directly or through private or public transportation providers. Further, some FTA programs require or encourage their grantees to coordinate transportation services. For example, FTA's Enhanced Mobility of Seniors and Individuals with Disabilities program--which provides formula funding to states to serve the special needs of transit-dependent populations beyond traditional public-transportation service--requires grantees to coordinate their transportation services and establish locally developed, coordinated public transit-human services transportation plans. We continue to examine these funding, service delivery, and coordination issues. Chairman Johnson, Ranking Member Crapo, and Members of the Committee, 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 staff have any questions about this testimony, 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 statement. In addition, to the contact named above, Cathy Colwell, Geoffrey Hamilton, Hannah Laufe, Sara Ann Moessbauer, Tina Paek, Stephanie Purcell, and Amy Rosewarne made key contributions to this statement. Transportation-Disadvantaged Populations: Coordination Efforts are Underway, but Challenges Continue. GAO-14-154T. Washington, D.C.: November 6, 2013. Transit Asset Management: Additional Research on Capital Investment Effects Could Help Transit Agencies Optimize Funding. Washington, D.C.: July 11, 2013. High-Risk Series: An Update. GAO-13-283. Washington, D.C.: February 2013. ADA Paratransit Services: Demand Has Increased, but Little is Known about Compliance. GAO-13-17. Washington, D.C.: November 15, 2012. Public Transit: Funding for New Starts and Small Starts Projects, October 2004 through June 2012. GAO-13-40. Washington, D.C.: November 14, 2012. Bus Rapid Transit: Projects Improve Transit Service and Can Contribute to Economic Development. GAO-12-811. Washington, D.C.: July 25, 2012. Transportation-Disadvantaged Populations: Federal Coordination Efforts Could Be Further Strengthened. GAO-12-647. Washington, D.C.: June 20, 2012. Government Operations: Opportunities to Reduce Potential Duplication in Government Programs, Save Tax Dollars, and Enhance Revenue. GAO-11-318SP. Washington, D.C.: March 1, 2011. 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.

Millions of passengers use transit services on a daily basis, and many transit agencies that provide these services receive federal funding. To meet the needs of these passengers in a challenging economy, transit agencies must use federal and other resources wisely, while ensuring quality service. The July 2012 surface transportation reauthorization act--MAP-21--has addressed a number of transit issues by strengthening federal authority to oversee transit safety and emphasizing the restoration and replacement of aging infrastructure, among other things. While it is too early to assess all of the impacts of MAP-21, the work GAO has done can help inform the next surface transportation reauthorization act. This testimony covers GAO's recent work on: (1) funding transit; (2) improving capital decision making; and (3) coordinating services for transit-disadvantaged populations. To address these objectives, GAO drew from its recent reports issued from March 2011 through November 2013. GAO has also analyzed MAP-21, recent rulemaking, and other reports. The Moving Ahead for Progress in the 21st Century Act (MAP-21) authorized $10.6 and $10.7 billion for fiscal years 2013 and 2014, respectively, for public transit, but did not address long-term funding. Federal funds available for FTA's transit programs come from the general fund of the U.S. Treasury and the Mass Transit Account of the Highway Trust Fund. The Highway Trust Fund supports surface transportation programs, including highways and transit, and is funded through motor fuel and other highway use taxes; however, revenues have eroded over time because federal fuel tax rate stagnation, fuel efficiency improvements, and the use of alternative fuel vehicles. In May 2013, the Congressional Budget Office estimated that to maintain current spending levels plus inflation between 2015 and 2022, the Fund will require over $132 billion more than it is expected to take in over that period. GAO reported that while Congress transferred over $50 billion in general revenues to the Fund since fiscal year 2008, this approach may not be sustainable given competing demands for funding. For these reasons funding surface transportation remains on GAO's High-Risk List. To address these funding challenges, sound capital-investment decisions can help transit agencies use their funds more efficiently. GAO's work on transit asset management and bus rapid transit has illustrated these benefits. Transit asset management : According to the Federal Transit Administration (FTA), it would cost roughly $78 billion (in 2009 dollars) to rehabilitate or replace the nation's aging transit assets--such as buses, rail cars, and escalators. GAO's 2013 report on asset management recognized that many of the nearly 700 public transit agencies struggle to maintain their bus and rail assets in a state of good repair. Sound management practices can help agencies prioritize investments to help optimize limited funding. However, of the nine transit agencies GAO visited, only two measured the effects of capital investments on asset condition and none measured the effects on future ridership. Thus, GAO recommended additional research to measure the effects of capital investments; FTA concurs in part with this recommendation. FTA agency officials recognize the importance of additional research; however, they are hesitant to commit additional resources given their current budget situation. Bus rapid transit (BRT) : In addition to maintaining assets, transit agencies often need to build or expand systems to meet demand. Transit agencies can apply for federal capital-investment funding for new projects through New and Small Starts and Core Capacity Improvement grants. GAO's 2012 report found that many agencies had taken advantage of New and Small Starts funding to develop BRT projects, which generally require less capital investment compared to rail. GAO's recent work also shows benefits from coordinating transit services for the transportation-disadvantaged--those who cannot provide their own transportation or face challenges accessing public transportation. GAO's 2012 report pointed out that coordination can be challenging, as federal programs provide funding for a variety of services. GAO also concluded that insufficient federal leadership and guidance on coordinating services for the disadvantaged may hinder coordination among state and local providers. The Coordinating Council--a group of federal agencies providing these services--has completed a strategic plan to strengthen interagency coordination, as GAO recommended. GAO made recommendations on these issues in previous reports. The Department of Transportation agreed to consider these recommendations and is in various stages of implementing them.

Concerned about the cost of AFDC, the Congress established the CSE program in 1975 as Title IV-D of the Social Security Act to help families obtain the financial support that noncustodial parents owe their children and to help single-parent families achieve or maintain economic self-sufficiency. It was anticipated that government welfare expenditures would be reduced by recouping AFDC benefits from noncustodial parents' child support payments. In addition, earlier enforcement of child support obligations for families not receiving AFDC would prevent such families from needing government support. CSE services provided through the program include locating noncustodial parents; establishing paternity and support orders; updating support orders to be current with a noncustodial parent's income; obtaining medical support, such as medical insurance, from noncustodial parents; and collecting ongoing and past-due support payments. All AFDC recipients are required to participate in the CSE program so that the federal and state governments may recover some portion of the AFDC benefits paid to families. In the case of non-AFDC families, participation in the program is voluntary and most collections are distributed to custodial parents. The federal and state governments retain collections on AFDC cases as recoupment of AFDC benefits paid to families. More specifically, the government retains all past-due support collected and all but $50 of each month's current support collected on AFDC cases, up to the amount of the family's monthly AFDC benefits. If the current support collected together with family income makes families ineligible for AFDC, all current support is distributed to the family and the monthly AFDC benefit is not paid. The federal and state governments share retained collections on AFDC cases by the same percentage as they funded AFDC benefits to families in the state. The percentage of AFDC benefit payments that is funded by the federal government is inversely related to state per capita income and varies from state to state, ranging from 50 percent in states with high per capita incomes, such as California, to close to 80 percent in a state with relatively low per capita income, such as Mississippi. Collections on non-AFDC cases, though generally not retained by the federal and state governments, might indirectly benefit them. The receipt of these collections by non-AFDC families might preclude the need for these families to seek AFDC benefits, thus enabling the governments to avoid incurring the cost of paying AFDC benefits. Under the CSE funding structure, the federal government reimburses states for 66 percent of their CSE administrative costs for both AFDC and non-AFDC services. States are responsible for the remaining 34 percent. The federal government also pays performance incentives to states on the basis of their efficiency in collecting support on both AFDC and non-AFDC cases. These incentives are calculated separately for AFDC and non-AFDC collections. Collection efficiency is determined by dividing AFDC and non-AFDC collections each by total administrative costs. Incentives are paid on the basis of the resulting ratios and range from 6 percent of collections for ratios less than 1.4 to 10 percent of collections for ratios of 2.8 or higher. In practice, all states earn at least 6 percent on AFDC and non-AFDC collections. The total amount of non-AFDC incentives paid, however, is limited to 115 percent of the amount of incentives paid for AFDC collections. The incentive formula seeks to ensure that states provide equitable treatment for both AFDC and non-AFDC families. All but two states had reached the 115-percent cap on non-AFDC incentives in fiscal year 1994. The federal and state governments' net financial revenues or costs from the CSE program are determined by their respective share of (1) AFDC collections retained, (2) CSE administrative costs incurred, and (3) performance incentives paid or received for both AFDC and non-AFDC collections. Privatized child support contracts in the states cover one or more services and, in general, either supplement state or local program efforts or replace them with privatized offices. As we reported in our November 1995 report, one or more child support services had been privatized statewide in 20 states and at the local office level in 18 states as of October 1995. There were 21 contracts for full-service child support operations, 41 contracts for collections and related parent location services, 9 contracts for payment processing services, and 8 contracts for location services only. Most of these services were being provided by four major contractors. As evident from our November 1995 report, the most widely privatized service was for the collection of support payments. Services provided under the 41 contracts for support payment collection are typically those performed by debt-collection agencies. These include sending letters and making telephone calls to persons owing support, often after searching various sources, such as credit bureaus, utility companies, and telephone books, to locate parents and obtain their current addresses and telephone numbers. Under the terms of most collection contracts, contractors are paid only if collections are made. Payments to contractors are often calculated as a percentage of collections--on both AFDC and non-AFDC cases. The payment rates identified for collection contracts in our November 1995 report range from about 8 percent to 24 percent and largely depend on factors such as contract case volume, case collection difficulty, type of cases referred (AFDC or non-AFDC), and the use of multiple or single contractors. States are eligible for federal reimbursement of 66 percent of the payments to contractors as CSE administrative costs. When states contract with private firms to provide child support collection services for portions of their caseloads, they often do so to help service their growing caseloads. Some have found it difficult to hire additional staff in an environment of staff and budgetary constraints brought about by increased pressures to downsize government. Recent estimates of CSE caseloads nationwide range from 300 cases to as many as 2,500 cases per worker. In 1994, states were able to collect only 55 percent of support due that year and only 7 percent of support due from prior years. State CSE officials said that contracting with the private sector allows them to service portions of their caseloads without hiring additional staff and to obtain support payments they have been unable to collect. For example, an official from Virginia told us that past-due AFDC cases are sent to contractors because state staff rarely have time to work them. Also, an official from New Mexico said that cases the state sends to contractors for collection services are ones on which the state would not try to collect, believing them difficult to collect and, therefore, not cost-effective to pursue. Another reason that state officials cited for privatizing was that contracting collections allows their staff to concentrate on paternity and order establishment, functions that the officials believed state employees are more adept at handling than collections. Similarly, some state officials believed that collection agencies have greater expertise and proficiency at collections than state employees. States are predominantly privatizing collections of past-due support. Of the 41 collection service contracts identified in our November 1995 report, 35 provided for collection of past-due support; 12 of these focused strictly on collecting past-due support for AFDC cases, while the remainder provided for collection of past-due support for both AFDC and non-AFDC cases. Of the remaining 6 contracts, 3 provided for collection of both current and past-due support for AFDC and non-AFDC cases and 3 allowed individual caseworkers discretion to decide what type of child support cases to send to collection contractors. All nine states we reviewed had criteria for selecting cases to refer for private collection services that were intended to identify cases on which support was hard-to-collect or uncollectible. All the criteria specified minimum periods of time for which collections had not been made, minimum accumulated amounts of past-due support, or both. For example, in Missouri, the criteria specified that cases with at least 6 months of support past-due that was in an amount in excess of $500 and for which no payments had been made in a year should be referred to the contractor. In addition to the minimum time and past-due support criteria, Kansas and Idaho referred only closed AFDC cases--those involving custodial parents who were not currently receiving AFDC, but in which the noncustodial parent owed support to the state from prior periods when the state paid AFDC benefits to the custodial parent. An official from Kansas said that closed AFDC cases referred for collection are ones the state had tried unsuccessfully for several years to collect on and were not currently receiving attention. State decisions about what types of cases to refer for privatized collection determine whether and the extent to which families and the federal and state governments benefit from collection contracts. Collections on AFDC cases benefit governments directly because they retain some of the support collected, while collections on non-AFDC cases benefit families directly because most collected support is distributed to them. Whether the federal or state governments experience net CSE revenues or costs from collection contracts is principally affected by (1) AFDC cost-sharing ratios, (2) states' efficiency in making collections that earn incentives under the CSE program, and (3) the CSE administrative cost-sharing ratio. We did not assess whether the contracts were cost-effective compared to increased state efforts to collect. The federal and state governments benefited from collections under all 11 contracts that we analyzed because all the states involved referred AFDC cases for collection, as shown in table 1. On AFDC cases, the federal and state governments retained all collections of past-due support and all but $50 of current support collected up to the amount of each families' monthly AFDC benefit. Furthermore, states earned performance incentives from the federal government on both AFDC and non-AFDC collections. Families also benefited from collections under five contracts that collected on AFDC, non-AFDC, or both types of cases. Contractors in Maryland and Michigan collected support that was distributed to both AFDC and non-AFDC families, while the contractor in Missouri collected support distributed to only AFDC families and the contractor in Texas to only non-AFDC families. As illustrated in figure 1, the net financial revenues or costs of the CSE program to the federal government are equal to its share of retained AFDC collections, minus performance incentives paid states, minus its share of CSE administrative costs. For state governments, the computation is the same except that performance incentives are added instead of subtracted. Retained collections are calculated by multiplying the federal or state government's AFDC cost-sharing ratio by AFDC collections reduced by the amounts passed through to families. For example, if AFDC collections were $100,000 and $18,000 was passed through to families, the remaining $82,000 in collections would be available for sharing by the federal and state governments. If the federal government's AFDC cost share in the state was 60 percent, the federal government's retained collections would equal 60 percent of $82,000, or $49,200. The state's share would be 40 percent of $82,000, or $32,800. The performance incentives are calculated by computing the state's collection efficiency ratios for AFDC and non-AFDC collections to determine the percentage of incentives earned, then multiplying the earned percentages by the associated type of collections--most states earn 6 percent incentives and have reached the 115-percent cap on non-AFDC incentives. For example, if AFDC collections were $100,000 as above, non-AFDC collections $400,000, and total administrative expenses $125,000, the collection efficiency ratio for AFDC collections would equal 0.8 ($100,000 in collections divided by $125,000 in administrative expenses). Collection efficiency ratios lower than 1.4 earn 6 percent AFDC incentives; therefore, AFDC incentives in this example would equal 6 percent of $100,000, or $6,000. The non-AFDC collection efficiency ratio in this example equals 3.2, $400,000 divided by $125,000. This ratio would earn incentives of 10 percent of collections. However, since non-AFDC incentives cannot exceed 115 percent of AFDC incentives, non-AFDC incentives that can be received in this example would be limited to 115 percent times $6,000, or $6,900. Thus, the federal government would pay the states $12,900 in performance incentives on the $500,000 in collections. Contract costs are calculated by multiplying the contract percentage rate to be paid the contractor for collections by total collections. Continuing the above example, with total collections of $500,000 and a payment rate of 25 percent, contract costs would equal $125,000. The federal government would reimburse the states for 66 percent of these costs, or $82,500. Accordingly, in this example, the federal government would experience net CSE costs of $46,200, after receiving $49,200 in retained AFDC collections and paying $12,900 in performance incentives and $82,500 in contract costs. The state on the other hand would experience net CSE revenues of $3,200, after receiving $32,800 in retained AFDC collections and $12,900 in performance incentives and paying $42,500 in costs. Table 2 summarizes the several factors that affect the calculation of the federal and state governments' respective shares of retained collections, performance incentives, and contract costs. As shown in table 1, collections under 10 of the 11 contracts we analyzed generated net CSE financial revenues for both the federal and state governments. The federal government's net revenues were less than the states' under the seven contracts in Kansas, Maryland, Michigan (number 4), Missouri, Nevada, Texas, and Virginia and greater than the states' under the three contracts in Idaho and New Mexico. Under one contract in Michigan (number 5), the federal government experienced net CSE costs, while the state experienced net revenues. The influence of case type on retained collections and of total collections on contract costs can be seen in the outcomes under the two contracts in Michigan. As shown in table 1, under contract number 5, the federal government experienced net CSE costs in part because most of the collections were for non-AFDC support, none of which was retained by the federal or state governments. Furthermore, the non-AFDC collections were about six times as great as AFDC collections, contributing to higher contract costs but not retained collections. Consequently, under this contract, the federal government's share of retained AFDC collections was not large enough to offset its share of contract costs and performance incentives paid to the state based on AFDC and non-AFDC collections. In contrast, under contract number 4 in Michigan, even though non-AFDC collections were greater than contract number 5, the federal government experienced net CSE financial revenues. This occurred because AFDC collections were a larger share of total collections than under the other contract. In addition, contract costs as a percentage of collections were lower on contract number 4--8 percent and 3 percent compared with 14 percent and 12 percent of collections on contract number 5. The influence of whether collections are AFDC or non-AFDC is also apparent in the outcomes of the contracts in Nevada and Kansas. Although contract costs as a percentage of total collections in these two states were relatively high--41 percent to 65 percent, respectively--both the federal and state governments experienced net revenues because all collections under the contracts were past-due AFDC, which are fully retained by the governments. Costs reported to us for these two contracts included state costs for computer programming and administering the contract in addition to the percentage of collections paid the contractor. Another factor influencing the financial outcomes of collection contracts is the AFDC cost-sharing ratio, as illustrated by the financial outcomes under the contracts in Idaho and New Mexico. Under the three contracts in these states, the federal government's net CSE revenues were greater than those of the states, largely because the federal share of retained AFDC collections was relatively high--ranging from 70 percent to 73 percent. The influence of AFDC cost-sharing ratios on retained collections and of AFDC or non-AFDC collections on contract costs also can be seen in comparing the financial outcomes from the contracts in Maryland and Texas for fiscal year 1995. The federal government gained less net revenue under the contract in Maryland than in Texas. One reason for this result is that the federal government's share of retained AFDC collections was less in Maryland than in Texas--50 percent compared with 64 percent. In addition, contract costs were higher under the contract in Maryland because total collections were greater and non-AFDC collections (not retained) were greater than AFDC collections (retained) by a ratio of about 3 to 2, thus contributing to higher contract costs but not retained collections. The financial outcomes of collection contracts for families and government will be impacted by changes to be implemented under recent welfare reform legislation--the Personal Responsibility and Work Opportunity Reconciliation Act of 1996. For example, among several such changes, after September 2000, for families that are no longer receiving government assistance, collection of past-due support that accrued before or after the family received such assistance generally will be distributed first to the family. Furthermore, the pass-through to families of the first $50 of current support payments collected will no longer be mandatory. If states choose to continue to pass-through the $50 and disregard it in determining the income of families receiving assistance, the states must pay for the disregard with state funds. The legislation also affects the incentive payments that states receive. It directs the Secretary of HHS in consultation with the states to develop a new performance incentive system to replace, in a revenue neutral manner, the existing system. The legislation requires the Secretary to report on the new system to the Congress by March 1, 1997, and makes the new system effective on October 1, 1999. In commenting on a draft of this report, HHS said that it believes that our report should be a useful reference to states as they consider privatizing child support functions. HHS also provided technical comments that we incorporated in the final report as appropriate. We are sending copies of this report to the Chairmen and Ranking Minority Members of the Senate Committee on Finance and the House Subcommittee on Human Resources, Committee on Ways and Means; the Secretary of HHS; and HHS' Assistant Secretary for Children and Families. We will also make copies available to others on request. We will continue to keep you and your staff informed of our progress in reviewing state CSE privatization initiatives. If you or your staff have any questions about this report, please contact David P. Bixler, Assistant Director, at (202) 512-7201 or Catherine V. Pardee, Senior Evaluator, at (202) 512-7237. Using contract cost and collection data provided by state and local CSE offices, we determined the financial outcomes for 11 collection contracts by calculating (1) collections distributed to families and retained by the federal and state governments and (2) net CSE financial revenues or costs for the federal and state governments. The net CSE financial revenues or costs to the governments equal the federal or state governments' respective share of (1) retained collections, (2) performance incentives paid by the federal government and received by states, and (3) contract costs. We did not independently verify the contract cost and collection data provided by states. We sought data only on collection contracts listed in our November 1995 report in which payment terms were disclosed and stated as a percentage of collections, the most common method of payment in collection contracts. Although we sought data on more than 11 contracts, cost and collection data available from some states were insufficient to determine how support collected was distributed between families and the federal and state governments. Specifically, some states could not separately identify amounts of collections on non-AFDC and AFDC cases and the total amount of current AFDC support distributed to AFDC families on cases with collections. For these reasons, our data analysis and interviews were limited to 11 contracts in nine states: Idaho, Kansas, Maryland, Michigan, Missouri, Nevada, New Mexico, Texas, and Virginia. Our calculation of net CSE financial revenues or costs constitutes a comparison of additional collections with additional collection costs. Support collected under the 11 collection contracts was classified by the state programs as uncollectible or expected to be uncollectible, and we assumed that collections under the contracts would not have been made by the states. Payments to the contractors represented additional costs that the states invested in collection efforts on cases under the contract. We did not attempt to determine whether the states would have spent more or less to collect the amounts using state employees or through other means. With the exception of two states, the contract cost data that states provided included only the payments to contractors based on a percentage of collections. Additional state costs associated with the collection contracts, such as for contract negotiation and administration, could not be determined and were not included in our calculations. In calculating the governments' respective share of retained collections, we used the AFDC cost-sharing ratios for each state for the same year as the collection contracts. In calculating performance incentives, we used statewide collection efficiency ratios for the states for 1994 as reported in data compiled by OCSE. We performed our work from November 1995 to August 1996 in accordance with generally accepted government auditing standards. Child Support Enforcement: States and Localities Move to Privatized Services (GAO/HEHS-96-43FS, Nov. 20, 1995). Child Support Enforcement: Opportunity to Reduce Federal and State Costs (GAO/T-HEHS-95-181, June 13, 1995). Child Support Enforcement: Families Could Benefit From Stronger Enforcement Program (GAO/HEHS-95-24, Dec. 27, 1994). Child Support Enforcement: Federal Efforts Have Not Kept Pace With Expanding Program (GAO/T-HEHS-94-209, July 20, 1994). Child Support Enforcement: Credit Bureau Reporting Shows Promise (GAO/HEHS-94-175, June 3, 1994). Child Support Enforcement: States Proceed With Immediate Wage Withholding; More HHS Action Needed (GAO/HRD-93-99, June 15, 1993). Child Support Assurance: Effect of Applying State Guidelines to Determine Fathers' Payments (GAO/HRD-93-26, Jan. 23, 1993). Child Support Enforcement: Timely Actions Needed to Correct System Development Problems (GAO/IMTEC-92-46, Aug. 13, 1992). Child Support Enforcement: Opportunity to Defray Burgeoning Federal and State Non-AFDC Costs (GAO/HRD-92-91, June 5, 1992). Interstate Child Support: Wage Withholding Not Fulfilling Expectations (GAO/HRD-92-65BR, Feb. 25, 1992). Interstate Child Support: Mothers Report Less Support From Out-of-State Fathers (GAO/HRD-92-39FS, Jan. 9, 1992). Child Support Enforcement: A Framework for Evaluating Costs, Benefits, and Effects (GAO/PEMD-91-6, Mar. 5, 1991). 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. 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Pursuant to a congressional request, GAO provided information on states' use of private agencies for the collection of child support payments, focusing on: (1) why states contract for these collection services; and (2) the factors affecting the financial outcomes of collection contracts for families and the federal and state governments. GAO found that: (1) states contract with private agencies to collect past-due or hard-to-collect child support payments because they are finding it increasingly difficult to service their growing child support enforcement caseloads with available staff and budget resources; (2) under the terms of most collection contracts, states pay contractors only if collections are made, and contractor payments are often a fixed percentage of collections; (3) the federal and state governments retain most of the child support payments collected for families receiving Aid to Families with Dependent Children (AFDC) benefits, while non-AFDC families receive most of the support payments collected; (4) the federal government's share of the child support collections depends on how much it contributes to the state's welfare program and how much it pays in performance incentives and child support enforcement administrative costs; and (5) a review of 11 contracts showed that the federal government's financial outcomes ranged from a net cost of about $242,000 to revenues of $1.2 million.

Since the 1940s, one mission of DOE and its predecessor agencies has been processing uranium as a source of nuclear material for defense and commercial purposes. A key step in this process is the enrichment of natural uranium, which increases its concentration of uranium-235, the isotope of uranium that undergoes fission to release enormous amounts of energy. Before it can be enriched, natural uranium must be chemically converted into uranium hexafluoride. The enrichment process results in two principal products: (1) enriched uranium hexafluoride, which can be further processed for specific uses, such as nuclear weapons or fuel for nuclear power plants; and (2) leftover "tails" of uranium hexafluoride. These tails are also known as depleted uranium because the material is depleted in uranium-235 compared with natural uranium. Since 1993, uranium enrichment activities at DOE-owned uranium enrichment plants have been performed by the U.S. Enrichment Corporation (USEC), formerly a wholly owned government corporation that was privatized in 1998. However, DOE still maintains over 700,000 metric tons of depleted uranium tails in about 63,000 metal cylinders in storage yards at its Paducah, Kentucky, and Portsmouth, Ohio, enrichment plants (see figure 1). It must safely maintain these cylinders because the tails are dangerous to human health and the environment. Uranium hexafluoride is radioactive and forms extremely corrosive and potentially lethal compounds if it contacts water. In addition, DOE also maintains large inventories of natural and enriched uranium that are also surplus to the department's needs. Tails have historically been considered a waste product because considerable enrichment processing is required to further extract the remaining useful quantities of uranium-235. In the past, low uranium prices meant that these enrichment services would cost more than the relatively small amount of uranium-235 extracted would be worth. However, an increase in uranium prices--from approximately $21 per kilogram of uranium in the form of uranium hexafluoride in November 2000 to about $160 per kilogram in May 2011--has potentially made it profitable to re-enrich some tails to further extract uranium-235. Even with the current higher uranium prices, however, only DOE's tails with higher concentrations of uranium-235 (at least 0.3 percent) could be profitably re- enriched, according to industry officials. DOE's potential options for its tails include selling the tails "as is," re- enriching them, or storing them indefinitely. However, DOE's legal authority to sell the tails in their current form is doubtful. We found that DOE generally has authority to carry out the re-enrichment and storage options. As we said earlier, DOE issued a comprehensive uranium management plan in December 2008 in response to a recommendation in our March 2008 report. In this plan, DOE stated that it would begin selling or re-enriching depleted uranium in 2009. However, to date, DOE has not done so and, according to DOE officials, has no current plans to sell or re- enrich this material. While selling the tails in their current unprocessed form is a potential option, we believe that DOE's authority to conduct such sales is doubtful because of specific statutory language in legislation governing DOE's disposition of its uranium. In 1996, Congress enacted section 3112 of the USEC Privatization Act, which limits DOE's general authority, under the Atomic Energy Act or otherwise, to sell or transfer uranium. In particular, section 3112 explicitly bars DOE from selling or transferring "any uranium"--including but not specifically limited to certain forms of natural and enriched uranium--"except as consistent with this section." Section 3112 then specifies conditions for DOE's sale or transfer of natural and enriched uranium of various types, including conditions in section 3112(d) for sale of natural and low-enriched uranium from DOE's inventory. To ensure the domestic uranium market is not flooded with large amounts of government material, in section 3112(d), Congress required DOE to determine that any such inventory sales will not have a material adverse impact on the domestic uranium industry. Congress also required in section 3112(d) that DOE determine it will receive adequate payment--at least "fair market value"--if it sells this uranium and that DOE obtain a determination from the President that such materials are not necessary for national security. However, neither section 3112(d) nor any other provision of section 3112 explicitly provides conditions for DOE to transfer or sell depleted uranium. Because section 3112(a) states that DOE may not "transfer or sell any uranium...except as consistent with this section," and because no other part of section 3112 sets out the conditions for DOE to transfer or sell depleted uranium, we believe that under rules of statutory construction, DOE likely lacks authority to sell the tails. While courts have not addressed this question before and thus the outcome is not free from doubt, this interpretation applies the plain language of the statute. It also respects the policy considerations and choices Congress made in 1996 when presented with the disposition of DOE's valuable uranium in a crowded and price-sensitive market. This reading of DOE's authority is consistent with how courts address changes in circumstances after a law is passed: Statutes written in comprehensive terms apply to unanticipated circumstances if the new circumstances reasonably fall within the scope of the plain language. Thus, under the current terms of section 3112, DOE's sale of its tails would be covered by the statute's general prohibition on sale of uranium, even if tails were not part of the universe Congress explicitly had in mind when it enacted the statute in 1996. Should Congress grant DOE the needed legal authority by amending the USEC Privatization Act or through other legislation, firms such as nuclear power utilities and enrichment companies would be interested in purchasing at least that portion of the tails with higher concentrations of extractable uranium-235 as a valuable source for nuclear fuel. For example, our March 2008 report stated that officials from 8 of 10 U.S. nuclear utilities indicated tentative interest in such a purchase. Individual utilities were often interested in limited quantities of DOE's tails because they were concerned about depending upon a single source to fulfill all of their uranium requirements. Multiple utilities acting together as a consortium could mitigate these concerns and purchase larger quantities of tails. The report also noted that some enrichment firms also told us of some interest in purchasing portions of the inventory, but their anticipated excess enrichment capacity to process the tails into a marketable form affected both the quantity of tails they would purchase and the timing of any purchase. Our March 2008 report noted that potential buyers suggested various commercial arrangements, including purchasing the tails through a competitive sale, such as an auction, or through negotiations with DOE. However, industry officials told us that buyers would discount, perhaps steeply, their offered prices to make buying tails attractive compared with purchasing natural uranium on the open market. That is, DOE might get a discounted price for the tails to compensate buyers for additional risks, such as rising enrichment costs or buyers' inability to obtain sufficient enrichment services. In addition, potential buyers noted that any purchase would depend on confirming certain information, such as that the tails were free of contaminants that could cause nuclear fuel production problems and that the cylinders containing the tails--some of which are 50 years old and may not meet transportation standards--could be safely shipped. Although DOE's legal authority to sell the tails in their current form is doubtful, DOE has the general legal option of re-enriching the tails and then selling the resulting natural or enriched uranium. DOE would have to contract for enrichment services commercially because the department no longer operates enrichment facilities itself. Furthermore, DOE would have to find a company with excess enrichment capacity beyond its current operations, which may be particularly difficult if large amounts of enrichment processing were required. Within the United States today, for example, there are only two operating enrichment facilities: DOE's USEC- run Paducah, Kentucky, plant and the URENCO USA facility located near Eunice, New Mexico. In the case of the Paducah plant, almost all of its enrichment capacity is already being used through 2012, when the plant may stop operating. In the case of URENCO USA, the facility is still under construction and it is not yet operating at full capacity. Other companies are also constructing or planning to construct new enrichment facilities in the United States that potentially could be used to re-enrich DOE's tails. Although DOE would have to pay for re-enrichment, it might obtain more value from selling the re-enriched uranium instead of the tails if its re- enrichment costs were less than the discount it would have to offer to sell the tails as is. Representatives of enrichment firms with whom we spoke at the time of our 2008 report told us they would be interested in re-enriching the tails for a fee. The quantity of tails they would re-enrich annually would depend on the available excess enrichment capacity at their facilities. Additionally, as noted above, prior to selling any natural or enriched uranium that results from re-enriching tails, DOE would be required under section 3112(d) of the USEC Privatization Act to determine that sale of the material would not have a material adverse impact on the domestic uranium industry and that the price paid to DOE would provide at least fair market value. Section 3112(d) also would require DOE to obtain the President's determination that the material is not needed for national security. DOE Could Store the Tails DOE also has the general legal option to store the tails indefinitely. In the late 1990s, when relatively low uranium prices meant that tails were viewed as waste, DOE developed a plan for the safe, long-term storage of the material. DOE has constructed new facilities at its Paducah plant and its closed Portsmouth uranium enrichment plant to chemically convert its tails into a more stable and safer uranium compound that is suitable for long-term storage. The facilities are currently undergoing system checks and once they begin operating in 2011, DOE estimates it will take approximately 25 years to convert its existing tails inventory. As our March 2008 report noted, storing the tails indefinitely could prevent DOE from taking advantage of the large increase in uranium prices to obtain potentially large amounts of revenue from material that was once viewed as waste. DOE would also continue to incur costs associated with storing and maintaining the cylinders containing the tails. These costs amount to about $4 million annually. Sale (if authorized) or re-enrichment of some of DOE's tails could also reduce the amount of tails that would need to be converted and, thereby, save DOE some conversion costs. Moreover, once the tails were converted into a more stable form of uranium oxide, DOE's costs to re-enrich the tails would be higher if it later decided to pursue this approach. This is because of the cost of converting the uranium oxide back to uranium hexafluoride, a step that would be required for re-enrichment. However, according to DOE officials, after the conversion plants begin to operate, the plants would first convert DOE's lower concentration tails because they most likely would not be economically worthwhile to re-enrich. This would give DOE additional time to sell or re-enrich the more valuable higher-concentration tails. Our March 2008 report noted that DOE had been developing a plan since 2005 to sell excess uranium from across its inventories of depleted, natural, and enriched uranium to generate revenues for the U.S. Treasury. In March 2008, DOE issued a policy statement that established a general framework for how DOE plans to manage its inventories. However, we noted that the March 2008 policy statement was not a comprehensive assessment of the sales, re-enrichment, or storage options for DOE's tails. The policy statement lacked specific information on the types and quantities of uranium that the department has in its inventory. Furthermore, the policy statement did not discuss whether it would be more advantageous to sell the higher-concentration tails as is (if authorized) or to re-enrich them. It also did not contain details on when any sales or re-enrichment may occur or DOE's legal authority to carry out those options under section 3112 of the USEC Privatization Act. It also lacked information on the uranium market conditions that would influence any DOE decision to potentially sell or re-enrich tails. Further, it did not analyze the impact of such a decision on the domestic uranium industry, and it did not provide guidance on how a decision should be altered in the event that market conditions change. Although the policy statement stated that DOE would identify categories of tails that have the greatest potential market value and that the department would conduct cost-benefit analyses to determine what circumstances would justify re-enriching and/or selling potentially valuable tails, it did not have specific milestones for doing so. Instead, the policy statement stated that this effort will occur "in the near future." Our March 2008 report therefore recommended that DOE should complete the development of a comprehensive uranium management assessment as soon as possible. We stated that the assessment should contain detailed information on the types and quantities of depleted, natural, and enriched uranium the department currently manages and a comprehensive assessment of DOE's options for this material, including the department's authority to implement these options. Furthermore, we stated that the assessment should analyze the impact of each of these options on the domestic uranium industry and provide details on how implementation of any of these options should be adjusted in the event that market conditions change. In December 2008, DOE issued an "Excess Uranium Inventory Management Plan." Among other things, the plan states that DOE would begin selling or re-enriching depleted uranium in 2009. However, the department has not, to date, sold or re-enriched any of its depleted uranium. According to DOE officials, the department currently has no plans to sell or re-enrich this material. At current uranium prices, we estimate DOE's tails to have a net value of $4.2 billion; however, we would like to emphasize that this estimate is very sensitive to changing uranium prices, which recently have been extremely volatile, as well as to the availability of enrichment capacity. This estimate assumes the May 2011 published uranium price of $160 per kilogram of natural uranium in the form of uranium hexafluoride and $153 per separative work unit--the standard measure of uranium enrichment services. Our model also assumes the capacity to re-enrich the higher- concentration tails and subtracts the costs of the needed enrichment services. It also takes into account the cost savings DOE would realize from reductions in the amount of tails that needed conversion to a more stable form for storage, as well as the costs to convert any residual tails. As noted above, this estimate is very sensitive to price variations for uranium as well as to the availability of enrichment services. Uranium prices are very volatile, and a sharp rise or fall in prices could greatly affect the value of the tails. For example, our March 2008 report estimated the tails had a net value of $7.6 billion. This estimate was based on the February 2008 published uranium price of $200 per kilogram of natural uranium and $145 per separative work unit. Prices for uranium have since fallen from $200 per kilogram of natural uranium to $160 per kilogram. There is no consensus among industry players whether uranium prices will fall or rise in the future or on the magnitude of any future price changes. Furthermore, the introduction of additional uranium onto the market by the sale of large quantities of DOE depleted, natural, or enriched uranium--assuming DOE obtains authority to sell depleted uranium--could also lead to lower uranium prices. Therefore, according to DOE's uranium management plan, DOE is limited to selling no more than 10 percent of the domestic demand for uranium annually. This is intended to help achieve DOE's goal of minimizing the negative effects of DOE's sales on domestic uranium producers. However, this limit lengthens the time necessary to market DOE's uranium, increasing the time the department is exposed to uranium price volatility. These factors all result in great uncertainty of the valuation of DOE's tails. In addition, the enrichment capacity available for re-enriching tails may be limited, and the costs of these enrichment services are uncertain. For example, at the time of our March 2008 report, USEC only had a small amount of excess enrichment capacity at its Paducah plant. If it used the spare capacity, USEC would only be able to re-enrich about 14 percent of DOE's most economically attractive tails between now and the possible closing of the plant in 2012. Although USEC officials told us at the time of our March 2008 report that the company was willing to explore options to extend the Paducah plant's operations beyond 2012 and dedicate Paducah's capacity solely to re-enriching DOE's tails after this point, negotiations between the company and DOE would be needed to determine the enrichment costs that would be paid by DOE. The Paducah plant uses a technology developed in the 1940s that results in relatively high production costs. Even if the Paducah plant were to be dedicated entirely to re-enriching DOE tails after 2012, over a decade would be required to complete the work because of limitations on the annual volume of tails that can be physically processed by the plant. This lengthy period of time would expose DOE to risks of uranium price fluctuations and increasing maintenance costs. USEC and other companies are constructing or planning to construct enrichment plants in the United States that utilize newer, lower-cost technology. However, these facilities are not expected to be completed until some time over the next decade. It is unclear exactly when these facilities would be fully operating, the extent to which they will have excess enrichment capacity to re-enrich DOE's tails, and what enrichment costs DOE could expect to pay. For example, the size of the fee DOE may have to pay an enrichment company to re-enrich its tails would be subject to negotiation between DOE and the company. In summary, as was the case when we reported in March 2008, the U.S. government has an opportunity to gain some benefit from material that was once considered a liability. Under current law, however, one potential avenue for dealing with DOE's depleted uranium tails--sale of the material in its current form--is likely closed to the department. Obtaining legal authority from Congress to sell depleted uranium under USEC Privatization Act section 3112 or other legislation would provide the department with an additional option in determining the best course of action to obtain the maximum financial benefit from its tails. Our March 2008 report therefore suggested that Congress consider clarifying DOE's statutory authority to manage depleted uranium, under the USEC Privatization Act or other legislation, including explicit direction about whether and how DOE may sell or transfer the tails. Depending on the terms of such legislation, a sale of DOE's tails could reap significant benefits for the government because of the potentially large amount of revenue that could be obtained. In any event, enacting explicit provisions regarding DOE's disposition of depleted uranium would provide stakeholders with welcome legal clarity and help avoid litigation that could interrupt DOE's efforts to obtain maximum value for the tails. DOE's issuance of a comprehensive uranium management plan in December 2008 provided welcome clarity on the department's plans for marketing its uranium. Unfortunately, DOE has failed to follow-through with the actions laid out in its plan. By not following its plan to sell or re- enrich some its tails beginning in 2009, DOE has increased uncertainty in the uranium market about its ultimate plans for its depleted uranium tails. In addition, DOE continues to be unable to quickly react to changing market conditions to achieve the greatest possible value from its uranium inventories. Chairman Whitfield, Ranking Member Rush, and Members of the Subcommittee, this completes my prepared statement. I would be happy to respond to any questions you or other Members of the Subcommittee may have at this time. If you have any questions or need additional information, please contact Gene Aloise 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 statement. Major contributors to this statement were Ryan T. Coles (Assistant Director), Antoinette Capaccio, Karen Keegan, and Susan Sawtelle. 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.

Since the 1940s, the Department of Energy (DOE) has been processing natural uranium into enriched uranium, which has a higher concentration of the isotope uranium-235 that can be used in nuclear weapons or reactors. This has resulted in over 700,000 metric tons of leftover depleted uranium, also known as "tails," that have varying residual concentrations of uranium-235. The tails are stored at DOE's uranium enrichment plants in Portsmouth, Ohio and Paducah, Kentucky. Although the tails have historically been considered a waste product, increases in uranium prices may give DOE options to use some of the tails in ways that could provide revenue to the government. GAO's testimony is based on its March 2008 report (GAO-08-606R). GAO updated the analysis in its 2008 report to reflect current uranium prices and actions taken by DOE. The testimony focuses on (1) DOE's options for its tails and (2) the potential value of DOE's tails and factors that affect the value. DOE's potential options for its tails include selling the tails "as is," re-enriching the tails, or storing them indefinitely. DOE's current legal authority to sell its depleted uranium inventory "as is" is doubtful, but DOE generally has authority to carry out the other options. (1) DOE's authority to sell the tails in their current unprocessed form is doubtful. Because of specific statutory language in 1996 legislation governing DOE's disposition of its uranium, DOE's authority to sell the tails in unprocessed form is doubtful, and under the rules of statutory construction, DOE likely lacks such authority. However, if Congress were to provide the department with the needed authority, firms such as nuclear power utilities and enrichment companies may be interested in purchasing these tails and re-enriching them as a source of nuclear fuel. (2) DOE could contract to re-enrich the tails. Although DOE would have to pay for re-enrichment, it might obtain more value from selling the re-enriched uranium instead of the tails if its re-enrichment costs were less than the discount it would have to offer to sell the tails as is. (3) DOE could store the tails indefinitely. This option conforms to an existing DOE plan to convert tails into a more stable form for long term storage, but storing the tails indefinitely could prevent DOE from obtaining the potentially large revenue resulting from sales at current high uranium prices. DOE issued a comprehensive uranium management plan in December 2008 that stated that the department would consider selling depleted uranium or re-enriching it to realize best value for the government and that it would begin selling or re-enriching depleted uranium in 2009. However, to date, DOE has not sold or re-enriched any of its depleted uranium and, according to DOE officials, has no current plans to do so. The potential value of DOE's depleted uranium tails is currently substantial, but changing market conditions could greatly affect the tails' value over time. Based on May 2011 uranium prices and enrichment costs and assuming sufficient re-enrichment capacity is available, GAO estimates the value of DOE's tails at $4.2 billion--about $3.4 billion less than GAO's March 2008 estimate. However, this estimate is very sensitive to changing uranium prices, which have dropped since GAO's March 2008 report was issued. GAO's estimate is also very sensitive to the availability of enrichment capacity. In particular, DOE would have to find a company with excess enrichment capacity beyond its current operations, which may be difficult if large amounts of enrichment processing were required. In its 2008 report, GAO suggested that Congress consider clarifying DOE's statutory authority to manage its tails. No action on this recommendation has been taken to date. Also, GAO recommended that DOE complete a comprehensive uranium management assessment. DOE issued a uranium management plan in December 2008 that addressed GAO's recommendation.

To respond to these questions, we interviewed agency and industry officials, reviewed documents, and consulted with biodefense experts. We conducted our review from June 2007 through August 2007 in accordance with generally accepted government auditing standards. The Project BioShield Act of 2004 (Public Law 108-276) was designed to encourage private companies to develop civilian medical countermeasures by guaranteeing a market for successfully developed countermeasures. The Project BioShield Act (1) relaxes some procedures for bioterrorism- related procurement, hiring, and research grant awarding; (2) allows for the emergency use of countermeasures not approved by FDA; and (3) authorizes 10-year funding (available through fiscal year 2013) to encourage the development and production of new countermeasures for chemical, biological, radiological, or nuclear agents. The act also authorizes HHS to procure these countermeasures for the Strategic National Stockpile. Project BioShield procurement involves actions by HHS (including ASPR, NIAID, FDA, and the Centers for Disease Control and Prevention (CDC)) and an interagency working group. Various offices within HHS fund the development research, procurement, and storage of medical countermeasures, including vaccines, for the Strategic National Stockpile. ASPR's role: ASPR is responsible for the entire Project BioShield contracting process, including issuing requests for information and requests for proposals, awarding contracts, managing awarded contracts, and determining whether contractors have met the minimum requirements for payment. ASPR maintains a Web site detailing all Project BioShield solicitations and awards. ASPR has the primary responsibility for engaging with the industry and awarding contracts for large-scale manufacturing of licensable products, including vaccines, for delivery into the Strategic National Stockpile. With authorities recently granted, the Biomedical Advanced Research and Development Authority (BARDA) will be able to use a variety of funding mechanisms to support the advanced development of medical countermeasures and to award up to 50 percent of the contract as milestone payments before purchased products are delivered. NIAID's role: NIAID is the lead agency in NIH for early candidate research and development of medical countermeasures for biodefense. NIAID issues grants and awards contracts for research on medical countermeasures exploration and early development, but it has no responsibility for taking research forward into marketable products. FDA's role: Through its Center for Biologics Evaluation and Research (CBER), FDA licenses many biological products, including vaccines, and the facilities that produce them. Manufacturers are required to comply with current Good Manufacturing Practices regulations, which regulate personnel, buildings, equipment, production controls, records, and other aspects of the vaccine manufacturing process. FDA has also established the Office of Counterterrorism Policy and Planning in the Office of the Commissioner, which issued the draft Guidance on the Emergency Use Authorization of Medical Products in June 2005. This guidance describes in general terms the data that should be submitted to FDA, when available, for unapproved products or unapproved uses of approved products that HHS or another entity wishes FDA to consider for use in the event of a declared emergency. The final emergency use authorization (EUA) guidance was issued in July 2007. CDC's role: Since 1999, CDC has had the major responsibility for managing and deploying the medical countermeasures--such as antibiotics and vaccines--stored in the Strategic National Stockpile. DOD is not currently a part of Project BioShield. Beginning in 1998, DOD had a program to vaccinate all military service members with BioThrax. DOD's program prevaccinates personnel being deployed to Iraq, Afghanistan, and the Korean peninsula with BioThrax. For other deployments, this vaccination is voluntary. DOD also has a program to order, stockpile, and use the licensed anthrax vaccine. DOD estimates its needs for BioThrax doses and bases its purchases on that estimate. An FDA-licensed anthrax vaccine, BioThrax, has been available since 1970. The vaccine has been recommended for a variety of situations, for example, laboratory workers who produce anthrax cultures. The BioShield program stockpiled BioThrax for the Strategic National Stockpile for postexposure use in the event of a large number of U.S. civilians being exposed to anthrax. ASPR had already acquired 10 million doses of BioThrax from Emergent BioSolutions by 2006 and recently purchased an additional 10 million doses. Three major factors contributed to the failure of the first Project BioShield procurement effort. First, ASPR awarded the first BioShield procurement contract to VaxGen when its product was at a very early stage of development and many critical manufacturing issues had not been addressed. Second, VaxGen took unrealistic risks in accepting the contract terms. Third, key parties did not clearly articulate and understand critical requirements at the outset. ASPR's decision to launch the VaxGen procurement contract for the rPA anthrax vaccine at an early stage of development, combined with the delivery requirement for 25 million doses within 2 years, did not take the complexity of vaccine development into consideration and was overly aggressive. Citing the urgency involved, ASPR awarded the procurement contract to VaxGen several years before the planned completion of earlier and uncompleted NIAID development contracts with VaxGen and thus preempted critical development work. NIAID awarded VaxGen two development contracts, neither of which was near completion when ASPR awarded the procurement contract. However, on November 4, 2004, a little more than a year after NIAID awarded VaxGen its second development contract, ASPR awarded the procurement contract to VaxGen for 75 million doses of its rPA anthrax vaccine. At that time, VaxGen was still at least a year away from completing the Phase 2 clinical trials under the second NIAID development contract. Moreover, VaxGen was still finishing up work on the original stability testing required under the first development contract. At the time of the award, ASPR officials had no objective criteria, such as Technology Readiness Levels (TRL), to assess product maturity. They were, however, optimistic that the procurement contract would be successful. One official described its chances of success at 80 percent to 90 percent. However, a key official at VaxGen told us at the same time that VaxGen estimated the chances of success at 10 percent to 15 percent. When we asked ASPR officials why they awarded the procurement contract when they did, they pointed to a sense of urgency at that time and the difficulties in deciding when to launch procurement contracts. According to industry experts, preempting the development contract 2 years before completing work--almost half its scheduled milestones--was questionable, especially for vaccine development work, which is known to be susceptible to technical issues even in late stages of development. NIAID officials also told us it was too early for a BioShield purchase. At a minimum, the time extensions for NIAID's first development contract with VaxGen to accommodate stability testing should have indicated to ASPR that development on its candidate vaccine was far from complete. After ASPR awarded VaxGen the procurement contract, NIAID canceled several milestones under its development contracts undermining VaxGen's ability to deliver the required number of doses within the 2-year time frame. VaxGen officials told us that they understood their chances for success were limited and that the contract terms posed significant risks. These risks arose from aggressive time lines, VaxGen's limitations with regard to in-house technical expertise in stability and vaccine formulation--a condition exacerbated by the attrition of key staff from the company as the contract progressed--and its limited options for securing additional funding should the need arise. Industry experts told us that a 2-year time line to deliver 75 million filled and finished doses of a vaccine from a starting point just after phase 1 trials is a near-impossible task for any company. VaxGen officials told us that at the time of the procurement award they knew the probability of success was very low, but they were counting on ASPR's willingness to be flexible with the contract time line and work with them to achieve success. In fact, in May 2006, ASPR did extend the contract deadlines to initiate delivery to the stockpile an additional 2 years. However, on November 3, 2006, FDA imposed a clinical hold on VaxGen's forthcoming phase 2 trial after determining that data submitted by VaxGen were insufficient to ensure that the product would be stable enough to resume clinical testing. By that time, ASPR had lost faith in VaxGen's technical ability to solve its stability problems in any reasonable time frame. When VaxGen failed to meet a critical performance milestone to initiate the next clinical trial, ASPR terminated the contract. According to VaxGen's officials, throughout the two development contracts and the Project BioShield procurement contract, VaxGen's staff peaked at only 120, and the company was consistently unable to marshal sufficient technical expertise. External expertise that might have helped VaxGen better understand its stability issue was never applied. At one point during the development contracts, NIAID--realizing VaxGen had a stability problem with its product--convened a panel of technical experts in Washington, D.C. NIAID officials told us that at the time of the panel meeting, they offered to fund technical experts to work with the company, but VaxGen opted not to accept the offer. Conversely, VaxGen officials reported to us that at the time NIAID convened the panel of experts, NIAID declined to fund the work recommended by the expert panel. Finally, VaxGen accepted the procurement contract terms even though the financial constraints imposed by the BioShield Act limited its options for securing any additional funding needed. In accordance with this act, payment was conditional on delivery of a product to the stockpile, and little provision could be made, contractually, to support any unanticipated or additional development needed--for example, to work through issues of stability or reformulation. Both problems are frequently encountered throughout the developmental life of a vaccine. This meant that the contractor would pay for any development work needed on the vaccine. VaxGen, as a small biotechnology company, had limited internal financial resources and was dependent on being able to attract investor capital for any major influx of funds. However VaxGen was willing to accept the firm, fixed-price contract and assume the risks involved. VaxGen did so even though it understood that development on its rPA vaccine was far from complete when the procurement contract was awarded and that the contract posed significant inherent risks. Important requirements regarding the data and testing required for the rPA anthrax vaccine to be eligible for use in an emergency were not known at the outset of the procurement contract. They were defined in 2005 when FDA introduced new general guidance on EUA. In addition, ASPR's anticipated use of the rPA anthrax vaccine was not articulated to all parties clearly enough and evolved over time. Finally, according to VaxGen, purchases of BioThrax raised the requirement for use of the VaxGen rPA vaccine. All of these factors created confusion over the acceptance criteria for VaxGen's product and significantly diminished VaxGen's ability to meet contract time lines. After VaxGen received its procurement contract, draft guidance was issued that addressed the eventual use of any unlicensed product in the stockpile. This created confusion over the criteria against which VaxGen's product would be evaluated, strained relations between the company and the government, and caused a considerable amount of turmoil within the company as it scrambled for additional resources to cover unplanned testing. In June 2005, FDA issued draft EUA guidance, which described for the first time the general criteria that FDA would use to determine the suitability of a product for use in an emergency. This was 7 months after the award of the procurement contract to VaxGen and 14 months after the due date for bids on that contract. Since the request for proposal for the procurement contract was issued and the award itself was made before the EUA guidance was issued, neither could take the EUA requirements into consideration. The procurement contract wording stated that in an emergency, the rPA anthrax vaccine was to be "administered under a 'Contingency Use' Investigational New Drug (IND) protocol" and that vaccine acceptance into the stockpile was dependent on the accumulation and submission of the appropriate data to support the "use of the product (under IND) in a postexposure situation." However, FDA officials told us they do not use the phrase "contingency use" under IND protocols. When we asked ASPR officials about the requirements for use defined in the contract, they said that the contract specifications were consistent with the statute and the needs of the stockpile. They said their contract used "a term of art" for BioShield products. That is, the contractor had to deliver a "usable product" under FDA guidelines. The product could be delivered to the stockpile only if sufficient data were available to support emergency use. ASPR officials told us that FDA would define "sufficient data" and the testing hurdles a product needed to overcome to be considered a "usable product." According to FDA, while VaxGen and FDA had monthly communication, data requirements for emergency use were not discussed until December 2005, when VaxGen asked FDA what data would be needed for emergency use. In January 2006, FDA informed VaxGen, under its recently issued draft EUA guidance, of the data FDA would require from VaxGen for its product to be eligible for consideration for use in an emergency. The draft guidance described in general FDA's current thinking concerning what FDA considered sufficient data and the testing needed for a product to be considered for authorization in certain emergencies. Because the EUA guidance is intended to create a more feasible protocol for using an unapproved product in a mass emergency than the term "contingency use" under an IND protocol that ASPR used in the procurement contract, it may require more stringent data for safety and efficacy. Under an IND protocol, written, informed consent must be received before administering the vaccine to any person, and reporting requirements identical to those in a human clinical trial are required. The EUA guidance--as directed by the BioShield law--eased both informed consent and reporting requirements. This makes sense in view of the logistics of administering vaccine to millions of people in the large-scale, postexposure scenarios envisioned. Because EUA guidance defines a less stringent requirement for the government to use the product, it correspondingly may require more testing and clinical trial work than was anticipated under contingency use. Several of the agencies and companies involved in BioShield-related work have told us the EUA guidance appears to require a product to be further along the development path to licensure than the previous contingency use protocols would indicate. VaxGen officials told us that if the draft EUA guidance was the measure of success, then VaxGen estimated significant additional resources would be needed to complete testing to accommodate the expectations under this new guidance. NIAID told us that the EUA guidance described a product considerably closer to licensure (85 percent to 90 percent) than it had assumed for a Project BioShield medical countermeasure (30 percent) when it initially awarded the development contracts. FDA considers a vaccine's concept of use important information to gauge the data and testing needed to ensure the product's safety and efficacy. According to FDA, data and testing requirements to support a product's use in an emergency context may vary depending on many factors, including the number of people to whom the product is expected to be administered. The current use of an unlicensed product involves assessing potential risks and benefits from using an unapproved drug in a very small number of people who are in a potentially life-threatening situation. In such situations, because of the very significant potential for benefit, safety and efficacy data needed to make the risk benefit assessment might be lower than in an emergency situation where an unlicensed vaccine might be offered to millions of healthy people. This distinction is critical for any manufacturer of a product intended for use in such scenarios--it defines the level of data and testing required. Product development plans and schedules rest on these requirements. However, in late 2005, as VaxGen was preparing for the second phase 2 trial and well into its period of performance under the procurement contract, it became clear that FDA and the other parties had different expectations for the next phase 2 trial. From FDA's perspective, the purpose of phase 2 trials was to place the product and sponsor (VaxGen) in the best position possible to design and conduct a pivotal phase 3 trial in support of licensure and not to produce meaningful safety and efficacy data to support use of the vaccine in a contingency protocol under IND as expected by VaxGen, ASPR, and CDC. This lack of a clear understanding of the concept of use for VaxGen's product caused FDA to delay replying to VaxGen until it could confer with ASPR and CDC to clarify this issue. Thus, we conclude that neither VaxGen nor FDA understood the rPA anthrax vaccine concept of use until this meeting. The introduction of BioThrax into the stockpile undermined the criticality of getting an rPA vaccine into the stockpile and, at least in VaxGen's opinion, forced FDA to hold it to a higher standard that the company had neither the plans nor the resources to achieve. ASPR purchased 10 million doses of BioThrax in 2005 and 2006 as a stopgap measure for post- exposure situations. The EUA guidance states that FDA will "authorize" an unapproved or unlicensed product--such as the rPA anthrax vaccine candidate--only if "there is no adequate, approved and available alternative." According to the minutes of the meeting between FDA and VaxGen, in January 2006, FDA reported that the unlicensed rPA anthrax vaccine would be used in an emergency after the stockpiled BioThrax, that is, "when all of the currently licensed had been deployed." This diminished the likelihood of a scenario where the rPA vaccine might be expected to be used out of the stockpile and, in VaxGen's opinion, raised the bar for its rPA vaccine. We identified two issues related to using the BioThrax in the Strategic National Stockpile. First, ASPR lacks an effective strategy to minimize waste. As a consequence, based on current inventory, over $100 million is likely to be wasted annually, beginning in 2008. Three lots of BioThrax vaccine in the stockpile have already expired, resulting in losses of over $12 million. According to the data provided by CDC, 28 lots of BioThrax vaccine will expire in calendar year 2008. ASPR paid approximately $123 million for these lots. For calendar year 2009, 25 additional lots--valued at about $106 million--will reach their expiration dates. ASPR could minimize the potential waste of these lots by developing a single inventory system with DOD--which uses large quantities of the BioThrax vaccine-- with rotation based on a first-in, first-out principle. Because DOD is a high-volume user of the BioThrax vaccine, ASPR could arrange for DOD to draw vaccine from lots long before their expiration dates. These lots could then be replenished with fresh vaccine from the manufacturer. DOD, ASPR, industry experts, and Emergent BioSolutions (the manufacturer of BioThrax) agree that rotation on a first-in, first-out basis would minimize waste. DOD and ASPR officials told us that they discussed a rotation option in 2004 but identified several obstacles. In July 2007, DOD officials believed they might not be able to transfer funds to ASPR if DOD purchases BioThrax from ASPR. However, in response to our draft report, DOD informed us that funding is not an issue. However, ASPR continues to believe that the transfer of funds would be a problem. DOD stated smallpox vaccine (Dryvax) procurement from HHS is executed under such an arrangement. Further, DOD and ASPR officials told us that they use different authorities to indemnify the manufacturer against any losses or problems that may arise from use of the vaccine. According to DOD, this area may require legislative action to ensure that vaccine purchased by ASPR can be used in the DOD immunization program. Finally, since DOD vaccinates its troops at various locations around the world, there may be logistical distribution issues. A DOD official acknowledged that these issues could be resolved. Second, ASPR plans to use expired vaccine from the stockpile, which violates FDA's current rules. Data provided by CDC indicated that two lots of BioThrax vaccine expired in December 2006 and one in January 2007. CDC officials stated that their policy is to dispose of expired lots since they cannot be used and continuing storage results in administrative costs. FDA rules prohibit the use of expired vaccine. Nevertheless, according to CDC officials, ASPR told CDC not to dispose of the three lots of expired BioThrax vaccine. ASPR officials told us that ASPR's decision was based on the possible need to use these lots in an emergency. ASPR's planned use of expired vaccine would violate FDA's current rules and could undermine public confidence because ASPR would be unable to guarantee the potency of the vaccine. The termination of the first major procurement contract for rPA anthrax vaccine raised important questions regarding the approach taken to develop a new anthrax vaccine and a robust and sustainable biodefense medical countermeasure industry by bringing pharmaceutical and biotechnology firms to form a partnership with the government. With the termination of the contract, the government does not have a new, improved anthrax vaccine for the public, and the rest of the biotech industry is now questioning whether the government can clearly define its requirements for future procurement contracts. Since HHS components have not completed a formal lessons-learned exercise after terminating VaxGen's development and procurement contracts, these components may repeat the same mistakes in the future in the absence of a corrective plan. Articulating concepts of use and all critical requirements clearly at the outset for all future medical countermeasures would help the HHS components involved in the anthrax procurement process to avoid past mistakes. If this is not done, the government risks the future interest and participation of the biotechnology industry. Given that the amount of money appropriated to procure medical countermeasures for the stockpile is limited, it is imperative that ASPR develop effective strategies to minimize waste. Since vaccines are perishable commodities that should not be used after their expiration dates, finding other users for the stockpile products before they expire would minimize waste. Because DOD requires a large amount of the BioThrax vaccine on an annual basis, it could use a significant portion of BioThrax in the stockpile before it expires. The report that we are issuing today makes three recommendations. To avoid repeating the mistakes that led to the failure of the first rPA procurement effort, we recommend that the Secretary of HHS direct ASPR, NIAID, FDA, and CDC to ensure that the concept of use and all critical requirements are clearly articulated at the outset for any future medical countermeasure procurement. To ensure public confidence and comply with FDA's current rules, we recommend that the Secretary of HHS direct ASPR to destroy the expired BioThrax vaccine in the stockpile. To minimize waste of the BioThrax vaccine in the stockpile, we recommend that the Secretaries of HHS and DOD develop a single integrated inventory system for the licensed anthrax vaccine, with rotation based on a first-in, first-out principle. HHS and DOD generally concurred with our recommendations. In addition, with regard to our recommendation on integrated stockpile, they identified legal challenges to developing an integrated inventory system for BioThrax in the stockpile, which may require legislative action. Although HHS and DOD use different authorities to address BioThrax liability issues, both authorities could apply to either DOD or HHS; consequently, indemnity does not appear to be an insurmountable obstacle for future procurements. Mr. Chairman, this concludes my remarks. I will be happy to answer any questions you or other members may have. For questions regarding this testimony, please contact Keith Rhodes at (202) 512-6412 or [email protected]. GAO staff making major contributions to this testimony included Noah Bleicher, William Carrigg, Barbara Chapman, Crystal Jones, Jeff McDermott, Linda Sellevaag, Sushil Sharma, and Elaine Vaurio. 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 anthrax attacks in September and October 2001 highlighted the need to develop medical countermeasures. The Project BioShield Act of 2004 authorized the Department of Health and Human Services (HHS) to procure countermeasures for a Strategic National Stockpile. However, in December 2006, HHS terminated the contract for a recombinant protective antigen (rPA) anthrax vaccine because VaxGen failed to meet a critical contractual milestone. Also, supplies of the licensed BioThrax anthrax vaccine already in the stockpile will start expiring in 2008. GAO was asked to testify on its report on Project BioShield, which is being released today. This testimony summarizes (1) factors contributing to the failure of the rPA vaccine contract and (2) issues associated with using the BioThrax in the stockpile. GAO interviewed agency and industry officials, reviewed documents, and consulted with biodefense experts. Three major factors contributed to the failure of the first Project BioShield procurement effort for an rPA anthrax vaccine. First, HHS's Office of the Assistant Secretary for Preparedness and Response (ASPR) awarded the procurement contract to VaxGen, a small biotechnology firm, while VaxGen was still in the early stages of developing a vaccine and had not addressed many critical manufacturing issues. This award preempted critical development work on the vaccine. Also, the contract required VaxGen to deliver 25 million doses of the vaccine in 2 years, which would have been unrealistic even for a larger manufacturer. Second, VaxGen took unrealistic risks in accepting the contract terms. VaxGen officials told GAO that they accepted the contract despite significant risks due to (1) the aggressive delivery time line for the vaccine, (2) VaxGen's lack of in-house technical expertise--a condition exacerbated by the attrition of key company staff as the contract progressed--and (3) VaxGen's limited options for securing any additional funding needed. Third, important Food and Drug Administration (FDA) requirements regarding the type of data and testing required for the rPA anthrax vaccine to be eligible for use in an emergency were not known at the outset of the procurement contract. In addition, ASPR's anticipated use of the rPA anthrax vaccine was not articulated to all parties clearly enough and evolved over time. Finally, according to VaxGen, the purchase of BioThrax for the stockpile as a stopgap measure raised the bar for the VaxGen vaccine. All these factors created confusion over the acceptance criteria for VaxGen's product and significantly diminished VaxGen's ability to meet contract time lines. ASPR has announced its intention to issue another request for proposal for an rPA anthrax vaccine procurement but, along with other HHS components, has not analyzed lessons learned from the first contract's failure and may repeat earlier mistakes. According to industry experts, the lack of specific requirements is a cause of concern to the biotechnology companies that have invested significant resources in trying to meet government needs and now question whether the government can clearly define future procurement contract requirements. GAO identified two issues related with the use of the BioThrax in the Strategic National Stockpile. First, ASPR lacks an effective strategy to minimize the waste of BioThrax. Starting in 2008, several lots of BioThrax in the Strategic National Stockpile will begin to expire. As a result, over $100 million per year could be lost for the life of the vaccine currently in the stockpile. ASPR could minimize such potential waste by developing a single inventory system with DOD--a high-volume user of BioThrax--with rotation based on a first-in, first-out principle. DOD and ASPR officials identified a number of obstacles to this type of rotation that may require legislative action. Second, ASPR planned to use three lots of expired BioThrax vaccine in the stockpile in the event of an emergency. This would violate FDA rules, which prohibit using an expired vaccine, and could also undermine public confidence because the vaccine's potency could not be guaranteed.

FDA may order a postapproval study for a device at the time FDA approves that device for marketing through its premarket approval (PMA) process or its humanitarian device exemption (HDE) process (for devices that treat rare diseases or conditions).the length of a postapproval study, but according to FDA guidance, the There are no statutory limits on device manufacturer and FDA agree on the study plan, which includes a study design (e.g., randomized clinical trial or other study design), the study's data source, and time frame for when the manufacturer will complete required reports. In contrast, FDA may order a postmarket surveillance study at the time of approval or clearance for certain devices or any time thereafter as long as certain criteria are met. (See table 1.) FDA may order a postmarket surveillance study not only for PMA and HDE devices, but also for devices that are cleared through the less stringent 510(k) premarket notification process--also known as the 510(k) process. FDA may order postmarket surveillance studies if failure of the device would be reasonably likely to have serious adverse health consequences, and such studies may be ordered when FDA officials identify an issue with a device FDA is through adverse advent reports or reviews of scientific literature.authorized to order postmarket surveillance studies for a duration of up to 36 months, but the time frame may be extended if the manufacturer and FDA are in agreement. Additionally, FDA may order a study with a longer duration if the device is expected to have significant use in pediatric populations and an extended period is necessary to assess issues like the impact of the device on children's growth or development. Manufacturers must periodically report to FDA information on these postmarket studies such as the progress of the study. Table 2 describes the various status categories that apply to postmarket studies. Cardiovascular devices, such as stents and heart valves, accounted for 56 percent of the 313 postapproval studies ordered from January 1, 2007, through February 23, 2015. Orthopedic and general and plastic surgery devices were the second and third most common subjects of postapproval studies, respectively. FDA also ordered postapproval studies for another 11 medical specialties, which are included in the other category. (See table 3.) The number of postapproval studies for cardiovascular devices varied from year to year, with the most cardiovascular device studies ordered in 2008 and 2012. (See fig. 1.) In general, FDA orders a postapproval study to obtain specific information on the postmarket performance of or experience with an approved device. For example, the increase in the number of postapproval studies ordered for cardiovascular devices in 2008 reflects that FDA has required that each new implantable cardioverter defibrillator lead undergo a postapproval study. Other includes devices for ophthalmic (e.g., intraocular lens); obstetrics and gynecology (e.g., permanent birth control system); gastroenterology-urology (e.g., gastric banding system); anesthesiology (e.g., computer assisted personalized sedation system); clinical chemistry (e.g., artificial pancreas device system); dental (e.g., bone grafting material); ear, nose, and throat (e.g., implantable hearing system); general hospital (e.g., infusion pump); microbiology (e.g., human papillomavirus test); neurology (e.g., intracranial aneurysm flow diverter); and pathology (e.g., breast cancer detection test). The PMA process is the more stringent of FDA's premarket review processes and requires the manufacturer to supply evidence providing reasonable assurance that the device is safe and effective before the device is legally available on the U.S. market. February 23, 2015, were for devices approved through the PMA process. In terms of study design, more than two-thirds (69 percent) of the 313 postapproval studies ordered during the timeframe we examined were prospective cohort studies--that is, studies in which a group using a particular device was compared to a second group not using that device, over a long period of time. (See fig. 2.) For example, one postapproval prospective cohort study was designed to follow patients who received a certain type of breast implant over a 10-year period and to collect information on complications as they occur. Additionally, postapproval studies were conducted using a variety of data sources, including newly collected data and medical device registries. Nearly two-thirds (196 studies) of the postapproval studies we examined relied upon new data collected by the manufacturer; and about one-third (98 studies) used data collected from registries--that is, a data system to collect and maintain structured records on devices for a specified time frame and population.maintained by the manufacturer or another organization, such as a (See table 4.) Registries may be created and medical specialty's professional association. For example, FDA has established a National Medical Device Registry Task Force to further examine the implementation of registries in postmarket surveillance. According to FDA, registries play a unique role in the postmarket surveillance of medical devices because they can provide additional detailed information about patients, procedures, and devices. For example, registries can help assess device performance by collecting information on patients with similar medical conditions. About 72 percent of the postapproval studies we examined (or 225 of the 313 studies ordered) were categorized as ongoing as of February 2015. An additional 20 percent were completed and the remaining 8 percent were inactive. (See fig. 3.) Further analysis of FDA data on the 225 ongoing postapproval studies showed 81 percent (or 182 studies) to be progressing adequately, while the remaining 19 percent (43 studies) were delayed as of February 2015. The 182 ongoing postapproval studies considered to be progressing adequately--that is, the study was pending, the protocol or plan was pending, or progress was adequate--had been ongoing for an average of 37 months, or a little over 3 years. Similarly, the 43 ongoing postapproval studies considered to be delayed--that is protocol/plan overdue, or progress inadequate--had been ongoing for an average of 39 months or a little over 3 years. Delayed studies include studies for which FDA had not approved a study plan within 6 months of the PMA approval date (3 studies) or studies which had begun, but had not progressed as intended (40 studies). According to FDA officials, a key reason for a study's delay may be limited patient enrollment into the postapproval study. FDA officials said they work with manufacturers to address manufacturers' inability to enroll patients, in part, by suggesting different strategies to improve enrollment, such as hiring a dedicated person for recruitment or reducing the cost of the study device to make it competitive with conventional treatments. Twenty percent (or 62 studies) of the 313 postapproval studies were categorized as completed as of February 23, 2015--that is, FDA determined that the manufacturer had fulfilled the study order and had closed the study. As table 5 shows, on average, these completed postapproval studies took about 36 months, or 3 years, with the longest study taking almost 7 years. The remaining 8 percent (or 26 studies) were categorized as inactive. Postapproval studies that are considered inactive include studies that, for example, involve a device that is no longer being marketed or the study's research questions are no longer relevant. FDA ordered 392 postmarket surveillance studies, half of which (196 studies) were for orthopedic medical devices, from May 1, 2008, through February 24, 2015. In 2011 alone, FDA ordered 176 studies for orthopedic devices following safety concerns about metal-on-metal hip implants, including potential bone or tissue damage from metal particles. (See fig. 4.) An additional 40 percent (or 158 studies) of the postmarket surveillance studies FDA ordered were for devices used in general and plastic surgery and obstetrics and gynecology procedures. FDA ordered 121 postmarket surveillance studies for devices in these medical specialties in 2012, following safety concerns about the use of implanted surgical mesh used for urogynecologic procedures, such as severe pain. About 10 percent of the postmarket surveillance studies were for devices in other medical specialties. Other includes general hospital (e.g., intravascular administration set), cardiovascular (e.g., vena cava filter), dental (e.g., temporomandibular joint implant), immunology, neurology, ophthalmic, and physical medicine devices. Between May 1, 2008, and February 24, 2015, about 94 percent of the postmarket surveillance studies ordered were for devices cleared through the 510(k) premarket notification process.regarding metal-on-metal implants and implantable surgical mesh used for urogynecologic procedures that arose after the devices were cleared through the 510(k) process, according to FDA officials. About 88 percent of the postmarket surveillance studies we examined (or 344 out of 392 studies) were categorized as inactive. (See fig. 5.) A study might be categorized as inactive, for example, because it had been consolidated, meaning that a manufacturer was able to combine an order for a postmarket surveillance study with other related study orders into a single study. For example, if FDA issued 22 orders for postmarket surveillance studies for different models of metal-on-metal implants from a single manufacturer, the manufacturer could combine all of the orders into a single study covering all of the devices, and the other 21 orders for postmarket surveillance studies would be categorized as consolidated and considered inactive. About 31 percent (or 108 studies) were inactive because they had been consolidated into another study. Another 31 percent of the inactive studies (or 107 studies) were categorized by FDA as either terminated, meaning the study was no longer relevant because, for example, the manufacturer changed the indication for use that was the subject of the postmarket surveillance study, or withdrawn by FDA because the manufacturer demonstrated the objective of the study using publicly available data and FDA agreed with the results. The remaining 38 percent (or 129 studies) were categorized as other--that is, the status does not fit in another category because, for example the device is no longer being marketed. However, according to FDA officials, if the manufacturer does begin marketing the device again, then it will have to conduct the study. The inactive category for postmarket surveillance studies includes studies with one of four FDA study statuses: (1) other--that is, the study status does not fit another category, because, for example, the device is no longer being marketed or is being redesigned; (2) consolidated--that is, the study was one of many postmarket surveillance studies ordered and the manufacturer, with the approval of FDA, consolidated these multiple studies into a single study; (3) terminated--that is, studies that were terminated by FDA because they were no longer relevant (e.g., the manufacturer changed the indication for use that was the subject of the postmarket surveillance study); or (4) withdrawn--that is, studies that were withdrawn because the manufacturer demonstrated the objective of the study using publicly available data and FDA agreed with the results. While 88 percent of the postmarket surveillance studies in our analysis were inactive, the remaining 12 percent (or 48 studies) were either still ongoing or completed as of February 24, 2015. Specifically, 10 percent (or 40 studies) were categorized as ongoing, while 2 percent (or 8 studies) were completed. Of the 40 ongoing postmarket surveillance studies, more than half were progressing adequately, while the rest were delayed. Further analysis showed the following: The 21 ongoing postmarket surveillance studies that FDA considered to be progressing adequately had been ongoing for an average of 33 months, or about 2.7 years. (See table 6.) The 19 ongoing postmarket surveillance studies that FDA considered to be delayed had been ongoing for an average of 49 months or about 4 years. Delayed studies included studies for which FDA had not approved a study plan within 6 months of ordering the study or studies that had begun but were not progressing as intended. According to FDA, postmarket surveillance studies may be delayed for reasons similar to postapproval studies, such as difficulty enrolling patients into the study. Regarding the eight completed postmarket surveillance studies, the average length of time to complete the study--that is, the time from the study order to the date FDA determined that the manufacturer had fulfilled the study order and had closed the study--was about 29 months or 2.4 years. FDA generally may order a manufacturer to conduct a postmarket surveillance study for up to 36 months unless the manufacturer and FDA agree to an extended time frame. We provided a draft of this report to the Secretary of Health and Human Services. HHS provided technical comments that were incorporated, as appropriate. 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 to the Secretary of Health and Human Services, appropriate congressional committees, and other interested parties. In addition, the report will be available at no charge on the GAO website at http://www.gao.gov. If you or your staff have any questions about this report, please contact me at (202) 512-7114 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 I. In addition to the contact named above, Kim Yamane, Assistant Director; Britt Carlson; Carolyn Fitzgerald; Sandra George; Cathleen Hamann; and Gay Hee Lee were major contributors to this report.

Americans depend on FDA--an agency within the Department of Health and Human Services (HHS)--to oversee the safety and effectiveness of medical devices sold in the United States. FDA's responsibilities begin before a new device is brought to market and continue after a device is on the market. As part of its postmarket efforts, FDA may order manufacturers to conduct two types of studies: (1) postapproval studies, ordered at the time of device approval, and (2) postmarket surveillance studies, generally ordered after a device is on the market. GAO was asked to report on the characteristics and status of postmarket studies. This report describes (1) the types of devices for which FDA has ordered a postapproval study and the status of these studies, and (2) the types of devices for which FDA has ordered a postmarket surveillance study and the status of these studies. GAO analyzed FDA data--including data on medical specialty and study status as of February 2015--for (1) postapproval studies ordered from January 1, 2007, through February 23, 2015, and (2) postmarket surveillance studies ordered from May 1, 2008, through February 24, 2015. These represent the time periods for which FDA reported consistently tracking study data. GAO also reviewed documents, such as FDA guidance, and interviewed FDA officials. HHS provided technical comments that were incorporated, as appropriate. Fifty-six percent of the 313 medical device postapproval studies--studies that are ordered at the time of device approval--the Food and Drug Administration (FDA) ordered from January 1, 2007, through February 23, 2015, were for cardiovascular devices and most were making adequate progress. Postapproval studies are ordered to obtain additional information not available before devices are marketed, such as a device's performance over the course of long-term use. In terms of study design, 69 percent of the 313 postapproval studies ordered were prospective cohort studies--that is, studies in which a group using a particular device was compared to a second group not using that device, over a long period of time. Most (72 percent) of the postapproval studies were ongoing as of February 2015, 20 percent of studies were completed, and 8 percent were inactive because, for example, the device is no longer marketed. Ongoing postapproval studies that GAO reviewed had been ongoing for an average of a little more than 3 years; FDA considered most of them (182 studies) to be progressing adequately and the rest (43 studies) to have inadequate progress or to otherwise be delayed. According to FDA officials, a key reason for a study's delay may be limited patient enrollment in the postapproval study. On average, manufacturers completed postapproval studies in about 3 years, with the longest study taking almost 7 years, for the studies that GAO reviewed. Ninety percent of the 392 medical device postmarket surveillance studies FDA ordered from May 1, 2008, through February 24, 2015, were for orthopedic devices and devices such as certain kinds of implantable surgical mesh following concerns with these types of devices, and many were consolidated into ongoing studies. Unlike postapproval studies, FDA may order postmarket surveillance studies at the time or after a device is approved or cleared for marketing--for example, if FDA becomes aware of a potential safety issue. Safety concerns about metal-on-metal hip implants, including potential bone and tissue damage from metal particles, led to an increase in such studies ordered in 2011. Forty percent of the 392 ordered studies were for implanted surgical mesh and other devices used in general and plastic surgery and obstetrics and gynecology procedures. FDA ordered most of these studies in 2012, following safety concerns associated with implanted surgical mesh, such as severe pain. Eighty-eight percent of the postmarket surveillance studies GAO analyzed were inactive as of February 2015. Inactive studies include those that were consolidated (108 studies), meaning that a manufacturer was able to combine an order for a postmarket surveillance study with other related study orders into a single study, such as combining studies of multiple device models into a single study; and those that were inactive for other reasons, such as if the order was for a device that is no longer marketed. The remaining 12 percent of the postmarket surveillance studies were either still ongoing (40 studies) or completed (8 studies). Of the 40 ongoing studies, more than half were progressing adequately, according to FDA, and had been ongoing for an average of a little less than 3 years; the rest were delayed and had been ongoing for an average of about 4 years as of February 2015. According to FDA, postmarket surveillance studies may be delayed for reasons similar to postapproval studies, such as difficulty enrolling patients into the study.

The DI program was established in 1956 to provide monthly cash benefits to individuals unable to work because of severe long-term disability. To meet the definition of disability under the DI program, an individual must have a medically determinable physical or mental impairment that (1) has lasted or is expected to last at least one year or to result in death and (2) prevents the individual from engaging in substantial gainful activity (SGA). In addition, to be eligible for benefits, workers with disabilities must have a specified number of recent work credits under Social Security when they acquired a disability. Spouses and children of workers may also receive benefits. Benefits are financed by payroll taxes paid into the DI Trust Fund by covered workers and their employers, and the benefit amount is based on a worker's earnings history. In November 2014, the program's average monthly benefit for disabled workers was about $1,146. Historically, very few DI beneficiaries have left the program to return to work. To encourage work, the DI program offers various work incentives to reduce the risk a beneficiary faces in trading guaranteed monthly income and subsidized health coverage for the uncertainties of employment--including a trial work period, and an extended period of eligibility for DI benefits. These incentives safeguard cash and health benefits while a beneficiary tries to return to work. For example, the trial work period allows DI beneficiaries to work for a limited time without their earnings affecting their disability benefits. Each month in which earnings are more than $780 is counted as a month of the trial work period. When the beneficiary has accumulated 9 such months (not necessarily consecutive) within a period of 60 consecutive months, the trial work period is completed. The extended period of eligibility begins the month after the trial work period ends, during which a beneficiary is entitled to benefits so long as he or she continues to meet the definition of disability and his or her earnings fall below the SGA monthly earnings limit. SSA regulations require all DI beneficiaries to promptly notify SSA when: their condition improves, they return to work, or they increase the amount they work or their earnings. Program guidance directs DI beneficiaries to report to SSA right away if work starts or stops; if duties, hours or pay change; or they stop paying for items or services needed for work due to a disability. Beneficiaries may report work by fax, mail, phone, or in person at an SSA field office. SSA staff are required by law and regulation to issue a receipt acknowledging that the beneficiary (or representative) has given SSA information about a change in work or earnings, and documenting the date that SSA received the work report. After receiving information about work activity or a pay stub from a beneficiary, SSA staff have five days to input the information into the system--which creates a pending work report or pay stub report--and hand or mail a receipt to the beneficiary. Staff then have an additional 30 days to review the pending work report to determine if an additional action, such as a work continuing disability review (CDR), is needed to assess the beneficiary's continued eligibility for DI benefits. See figure 1. SSA processes over 100,000 work reports or pay stubs annually. Benefit overpayments can occur when beneficiaries do not report work or SSA does not take action on work reports in an appropriate or timely manner. When a DI work-related overpayment is identified, the beneficiary is notified of the overpayment and may request reconsideration or waiver of that overpayment. SSA may grant a waiver request if the agency finds the beneficiary was not at fault AND recovery or adjustment would either defeat the purpose of the program or be against equity and good conscience, as defined by SSA. SSA's DI cumulative overpayment debt has almost doubled over the last decade, growing from $3.2 billion at the end of fiscal year 2004 to $6.3 billion at the end of fiscal year 2014, according to SSA data. Cumulative overpayment debt is comprised of existing debt carried forward from prior years, new debt, reestablished debts (debts reactivated for collection due to re-entitlement or another event) and adjustments, minus debts that are collected or written off by SSA. Cumulative DI overpayment debt has continued to grow because in nine of the last ten years the debt added exceeded the total debt collected and written off. Specifically, over the 10 years reviewed, SSA added about $15.4 billion in debt, while collecting and writing-off $12.3 billion. According to preliminary data provided by SSA, the agency overpaid DI beneficiaries a total of about $20 billion during fiscal years 2005 through 2014, and more than half of this total ($11 billion) was a result of beneficiaries' work-related earnings exceeding program limits. According to these data, each fiscal year an average of about 96,000 DI beneficiaries (or 28 percent of all beneficiaries overpaid each year) received excess benefits totaling $1.1 billion because their work activity exceeded program limits. The average work-related overpayment per beneficiary was almost $12,000 during this time period, ranging from $10,456 in fiscal year 2014 to $14,208 in fiscal year 2011. We are continuing to assess the reliability of these data as part of our ongoing work. SSA's annual stewardship reviews provide limited insight into the causes of overpayments. Stewardship reviews are based on a sample of cases, and are used by the agency to report on the accuracy of benefit payments. In its stewardship reports, SSA uses the term deficiency dollars to quantify the effect of each individual deficiency in a case which could cause an improper payment. In its last six stewardship reports, SSA reported that deficiency dollars related to beneficiaries' incomes being above DI program limits were consistently a leading cause of improper overpayments in the DI program. SSA also attributed some of these deficiencies to not taking appropriate or timely action to adjust payments when it was notified of beneficiaries' work activity. However, GAO has not yet fully evaluated SSA's methodology for conducting these reviews. Based on our discussions with SSA staff in field offices and teleservice centers, we identified a number of situations where beneficiaries report work or earnings, but staff may not enter information into the system, which is inconsistent with federal internal control standards, or may not provide a receipt, as mandated by law. Whether DI beneficiaries report work information in person or by fax, mail, or telephone to SSA field offices or the agency's 800 teleservice line, in accordance with procedures, staff must manually enter the information into the system to initiate tracking and issue a receipt. Specifically, SSA representatives have five days to manually enter the information into the eWork system, which also generates a receipt to be mailed or given to the beneficiary. Issuing a receipt is required by law and valuable to the beneficiary for two reasons: (1) the beneficiary can review the receipt to ensure that the information is correct; and (2) a beneficiary who later receives an overpayment can produce work report receipts to prove that he/she properly reported work activity. This system also tracks pending work reports to ensure completion within 30 days. Tracking is critical for ensuring SSA promptly processes the work report and takes the actions needed to adjust a beneficiary's benefits and minimize the chance of overpayments. However, in our work at several locations, SSA staff told us that if the eWork system is unavailable, or if the representative is busy, he or she may not enter the information and issue a receipt to the beneficiary. In addition, at one location, we learned that, until recently, SSA teleservice staff were using an alternate approach for sending work reports to the field office for manual entry and processing, instead of directly entering the information into the eWork system themselves. Work reports handled this way lack the controls in eWork; for example, they are not automatically tracked against the 30-day goal for work report completion. As such, they can be more easily missed or overlooked, and could be deleted or marked as completed without action being taken. Finally, claims representatives in the field office may also bypass the work report process entirely and initiate a work continuing disability review (CDR) instead. Some SSA claims representatives we interviewed told us that they skip the work report step and do a CDR instead because it is more efficient, but this means that the beneficiary does not receive a receipt. Stakeholder groups we interviewed have also observed problems with receipts, but SSA has limited data to assess this and other vulnerabilities in the work reporting process. In particular, stakeholders said that beneficiaries they work with do not always receive receipts, especially when reporting work by calling the 800 teleservice line. However, SSA's ability to determine the extent of these vulnerabilities is hindered, in part, due to data limitations. SSA's eWork system does not capture data that would help the agency determine how many work reports are filed by fax, mail, or in person. This system also does not allow SSA to determine how often staff go directly to a CDR without first completing a work report and issuing a receipt. Moreover, while SSA's system archives copies of printed receipts, it does not provide aggregate data on receipts provided. So even though SSA officials noted that local offices have procedures in place to ensure the timely processing of information received by mail or fax, data limitations prevent SSA from knowing the extent to which receipts are provided within five days. Further, according to SSA officials, determining the extent to which 800 teleservice staff might be using alternative approaches for sending work reports to field offices would require a significant effort to match data between two different systems. Although the agency monitors work reports for timeliness, SSA lacks guidance for processing work reports through completion, and monitoring them for quality. SSA has set a 30-day time frame for staff to screen pending work reports, and decide whether further action is required in light of the information in the work report, or whether the work report can be closed without additional action. Field office managers who oversee field office workloads have access to management information showing the number and age of pending work reports, and those we interviewed indicated that they follow up on pending work reports approaching the 30- day timeframe to ensure timely processing. However, the agency has not established policies or procedures detailing the steps staff must take in screening these reports. Federal internal control standards state that agencies' policies and procedures should be clearly documented in administrative policies or operating manuals. Without explicit policies or procedures on how to screen a work report--that is, how to evaluate whether it should be closed or referred to a work CDR to determine whether the beneficiary's benefits should be adjusted--there is an increased risk that a report could be improperly closed, and result in a beneficiary being overpaid. SSA also lacks guidance and processes for ensuring the accuracy and quality of its work report decisions. In our work at several field locations, we did not identify any processes that would have either assessed the accuracy or quality of the screening decision, or provide feedback to staff on how to improve their decision making. In accordance with federal internal control standards, agencies should assure that ongoing monitoring occurs in the course of normal operations, and assess the quality of performance over time. The absence of oversight and feedback increases the risk that the agency may not identify errors with work report decisions in a timely manner. SSA does not offer automated reporting options for DI beneficiaries -- similar to those currently used in SSA's Supplemental Security Income (SSI) program-- even though such options could address vulnerabilities we identified. According to SSA officials, SSA first piloted a telephone wage reporting system for SSI beneficiaries in 2003, and has used it nationally since 2008. In 2013, the agency also rolled out a mobile smartphone application for reporting work activity for SSI. Unlike the DI program's manual process, both of these SSI reporting options assist with agency tracking and issue receipts to the beneficiary without staff intervention. SSA has also noted that these automated reporting tools make reporting easier and more convenient for beneficiaries, and reduce field office workloads. SSA reported that it processed over 44,000 SSI telephone wage reports in September 2013, surpassing its fiscal year 2013 goal of 38,510 reports per month. In September 2013, the agency also received over 5,100 wage reports through its smartphone application. SSA continues to promote these methods and has stated that expanded use of automated reporting should help reduce improper payments in the SSI program. Despite potential benefits to the DI program, SSA officials told us the agency has not used SSI reporting systems for DI beneficiaries. In October 2010, SSA created a work group to begin exploring the development of a telephone reporting system for the DI program but, according to SSA officials, the project was discontinued in February 2011--after developing cost estimates for one year of development--due to lack of resources. They also told us these efforts were not resumed because the automated reporting in the DI program would not have the same return on investment as in the SSI program, due to the complexity of DI program rules. For example, officials stated determinations concerning DI work incentives--determinations that are currently a part of the work CDR process, not the DI work reporting process--cannot be easily automated. SSA officials also stated that they currently favor using the www.mysocialsecurity.gov portal as the best approach for providing automated reporting options to DI beneficiaries. However, they did not provide any information on plans, timelines or costs associated with implementing such an approach. In the meantime, the current, manual DI work activity reporting options leave the process more vulnerable to error, provide less proof of beneficiaries' due diligence, and subject beneficiaries to less convenient reporting mechanisms. Overpayments may arise because of unclear work reporting requirements and staff's differing interpretations of complex DI program rules. For example, SSA's regulations and its policy manual both state that DI beneficiaries should "promptly" report changes to work activity, but SSA has not defined this term, leaving this open to interpretation by both beneficiaries and SSA staff. Similarly, in its pamphlet "Working While Disabled," beneficiaries are instructed to report changes in their work "right away." However it does not prescribe a time period or frequency of reporting. During our site visits, we found variation in how staff instructed beneficiaries to report. For example, some staff said they instruct beneficiaries to report monthly, regardless of whether there are changes in their work, which is similar to the SSI program's wage-reporting requirements. Others told us they tell beneficiaries to report 10 days after any change, which is also similar to another SSI reporting requirement. One staff person indicated that she instructs beneficiaries not to bother reporting earnings under $15,780 per year, even though this earnings limit applies to those receiving Social Security retirement benefits, not DI. Thus a DI beneficiary who relied on such information could incur an overpayment. According to federal internal control standards, federal agencies should ensure that pertinent information is distributed to the right people in sufficient detail and at the appropriate time to enable them to carry out their duties and responsibilities efficiently and effectively. Further, our preliminary findings suggest that some SSA staff do not fully understand DI's complex work incentive rules. Service representatives who take work reports through SSA's 800 teleservice line or at the window in an SSA office are generally less highly trained or specialized in their knowledge about work incentives and may not always provide accurate information. For example, several staff we spoke with confused the trial work period earnings threshold with substantial gainful activity (SGA) earnings limits. Such a mistake might result in beneficiaries-- who, for example, plan to return to work--being told not to report earnings that they should be reporting. Stakeholder groups we spoke with cited similar examples of SSA staff providing beneficiaries with incorrect information on work incentives. SSA officials told us that in fiscal year 2013, the agency sampled calls received on its 800 teleservice line for quality review purposes, and found that calls regarding disabled work activity represented only 1 percent of the total call workload, but 2.3 percent of all errors identified. Several SSA managers we spoke with said that training could be enhanced for those staff answering calls on SSA's 800 teleservice line. SSA has developed a proposal to reduce complexity in the DI program, but has not tested or implemented this proposal to date. In its fiscal year 2012 budget request, SSA proposed the Work Incentives Simplification Pilot (WISP), to test a streamlined approach to evaluating DI Program work activity and reduce administrative workloads by making it simpler and less time-consuming for staff to verify earnings and validate benefits. It was also intended to reduce improper payments and eliminate rules that confuse beneficiaries, such as different definitions for income for the DI versus SSI program. Ultimately the agency hopes such an effort will reduce incidences of overpayments that may serve as a disincentive to DI beneficiaries who wish to work. SSA convened a Technical Advisory Panel to design a demonstration of WISP, which issued a report with recommendations in 2012 but also noted that the agency lacks authority to implement the proposed demonstration. However, the report also noted that SSA could conduct a pre-test to inform a large demonstration. This is an issue we will continue to explore in our ongoing work. Despite the importance and challenges associated with work reporting, SSA provides beneficiaries with infrequent reminders, and those reminders it does provide contain limited information about potential liability for overpayments. GAO's internal control standards state that management should ensure there are adequate means of communicating with, and obtaining information from, external stakeholders that may have a significant impact on the agency achieving its goals. SSA currently informs beneficiaries of reporting requirements when their benefit claim is initially approved; although it could be many years before a beneficiary returns to work. Nevertheless, one SSA representative/ manager indicated that the page signed by beneficiaries when they are initially approved for benefits could specifically include information about work reporting requirements, which would make it more difficult for beneficiaries who incur an overpayment to claim that they were unaware of their reporting responsibilities. SSA also sends an annual letter to beneficiaries regarding cost-of-living adjustments to their benefits that includes a reminder of their reporting responsibilities; however, several staff indicated that additional reminders would prompt more beneficiaries to report work. In contrast, in fiscal year 2014, SSA began providing a web-based service designed to prompt SSI beneficiaries to report wages, using notices, emails and reminders--an option not currently available for DI beneficiaries. SSA officials stated that the agency does not have near-term plans to provide additional notices to DI beneficiaries to encourage work reporting. Finally, although the initial application and annual letter mention potential liability for overpayments for beneficiaries who fail to report work, SSA's "Working While Disabled" pamphlet--which contains details about work incentives and is provided to beneficiaries who contact SSA about work--does not explain circumstances under which a beneficiary could be found liable for an overpayment. Some SSA staff we spoke with said they tell beneficiaries not to spend benefit checks or deposits that they believe were sent in error. However one stakeholder group we spoke with said that many beneficiaries mistakenly believe that, if they diligently report work and still receive benefits, then they must be entitled to those benefits. We will continue to assess the issues discussed in this statement and will report our final results later this year. Chairman Johnson, Ranking Member Becerra, 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 staff have any questions about this testimony, 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 statement. GAO staff members who made key contributions to this testimony are Michele Grgich (Assistant Director), James Bennett, Daniel Concepcion, Julie DeVault, Dana Hopings, Arthur Merriam, Jean McSween, Ruben Montes de Oca, James Rebbe, Martin Scire, Charlie Willson, and Jill Yost. 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.

SSA's DI program is one of the nation's largest cash assistance programs. To ensure that beneficiaries remain eligible, SSA regulations require that beneficiaries promptly report their work activity--including starting a job or a change in wages--to the agency in a timely manner. If the beneficiary does not report changes or if SSA does not properly process reported work information, SSA may pay out benefits in excess of what is due, resulting in an overpayment. In fiscal year 2014, SSA identified $1.3 billion in DI benefit overpayments. Avoiding overpayments is imperative as they pose a burden for beneficiaries who must repay excess benefits and result in the loss of taxpayer dollars when they cannot be repaid. In this statement based on ongoing work, GAO discusses preliminary observations regarding: 1) what is known about the extent of work-related DI overpayments; and 2) factors affecting SSA's handling of work activity reported by beneficiaries. GAO reviewed relevant federal laws, policies, and procedures, and prior GAO, OIG and SSA reports; analyzed 10 years of SSA data on overpayments; interviewed staff at SSA headquarters and at field offices and teleservice centers for three regions, selected to represent a range of relevant DI workloads. Over the last decade, preliminary data provided by the Social Security Administration (SSA) indicate that more than half of the $20 billion overpaid in the Disability Insurance (DI) program was associated with beneficiary work activity. Specifically, SSA's data indicate that between fiscal years 2005 and 2014, a total of $11 billion in DI overpayments were paid to beneficiaries with work earnings that exceeded program limits, with an annual average of 96,000 DI beneficiaries incurring an average work-related overpayment of $12,000. In its last 6 annual stewardship reports, SSA attributed some improper payments to its not taking appropriate action when notified of beneficiaries' work activity. GAO identified a number of factors that affect handling of work activity reports by beneficiaries--factors that stem from weaknesses in SSA's policies and procedures that are inconsistent with federal internal control standards. Such weaknesses increase the risk that overpayments may occur even when DI beneficiaries diligently try to follow program rules and report work and earnings. These weaknesses include: Vulnerabilities in processing work reports. Based on interviews with SSA staff, GAO identified process vulnerabilities that could result in staff not: (1) issuing a receipt that proves the beneficiary's work was reported--one of two criteria a beneficiary must meet for SSA to waive an overpayment; and (2) initiating tracking of work activity, which would help prevent overpayments. Data are not available to determine the extent to which this might occur. Limited guidance for processing and monitoring work reports. While SSA has metrics to ensure that staff take action on work reports in a timely manner, it lacks procedures detailing steps staff must take in screening these reports and for ensuring that pending work reports are systematically reviewed and closed with appropriate action, consistent with federal internal control standards. Not leveraging technology. In contrast to SSA's Supplemental Security Income (SSI) program--a means-tested disability benefits program--the DI program lacks automated tools for beneficiaries to report work. SSI recipients can report wages through an automated telephone reporting system and a smartphone app. SSA cited complex DI program rules and an unclear return on investment for not pursuing these options. However, this conclusion was based on a limited evaluation of costs. Meanwhile, SSA's current manual approach is vulnerable to error and may discourage reporting by beneficiaries who experience long wait times when they try to report work in person at offices or by telephone. Confusing work incentive rules. The DI program has complex work incentive rules, such that SSA staff interviewed by GAO had varying interpretations of program rules and gave beneficiaries differing instructions on how often to report their work and earnings. In 2012, SSA developed a proposal to simplify program rules, but stated that it does not currently have the authority to test or implement such changes. SSA requested authority that would allow it to conduct such tests in its 2016 budget proposal. As GAO finalizes its work for issuance later this year, it will consider making recommendations, as appropriate. GAO sought SSA's views on information included in this statement, but SSA was unable to provide its views in time to be incorporated.

VA's mission is to promote the health, welfare, and dignity of all veterans in recognition of their service to the nation by ensuring that they receive medical care, benefits, social support, and lasting memorials. Over time, the use of IT has become increasingly crucial to the department's effort to provide benefits and services. VA relies on its systems for medical information and records for veterans, as well as for processing benefit claims, including compensation and pension and education benefits. In reporting on VA's IT management over the past several years, we have highlighted challenges the department has faced in enabling its employees to help veterans obtain services and information more quickly and effectively while also safeguarding personally identifiable information. A major challenge was that the department's information systems and services were highly decentralized, giving the administrations a majority of the IT budget. In addition, VA's policies and procedures for securing sensitive information needed to be improved and implemented consistently across the department. As we have previously pointed out, it is crucial for the department CIO to ensure that well-established and integrated processes for leading, managing, and controlling investments in information systems and programs are followed throughout the department. Similarly, a contractor's assessment of VA's IT organizational alignment, issued in February 2005, noted the lack of control over how and when money is spent. The assessment noted that the focus of department-level management was only on reporting expenditures to the Office of Management and Budget and Congress, rather than on managing these expenditures within the department. In response to the challenges that we and others have noted, the department officially began its effort to provide the CIO with greater authority over IT in October 2005. At that time, the Secretary issued an executive decision memorandum granting approval for the development of a new management structure for the department. According to VA, its goals in moving to centralized management are to enable the department to perform better oversight of the standardization, compatibility, and interoperability of systems, as well as to have better overall fiscal discipline for the budget. In February 2007, the Secretary approved the department's new organizational structure, which includes the Assistant Secretary for Information and Technology, who serves as VA's CIO. As shown in figure 1, the CIO is supported by a principal deputy assistant secretary and five deputy assistant secretaries--new senior leadership positions created to assist the CIO in overseeing functions such as cyber security, IT portfolio management, systems development, and IT operations. In addition, the Secretary approved an IT governance plan in April 2007 that is intended to enable the Office of Information and Technology to centralize its decision making. The plan describes the relationship between IT governance and departmental governance and the approach the department intends to take to enhance IT governance. The department also made permanent the transfer of its entire IT workforce under the CIO, consisting of approximately 6,000 personnel from the administrations. Figure 2 shows a timeline of the realignment effort. Although VA has fully addressed two of six critical success factors that we identified as crucial to a major organizational transformation such as the realignment, it has not fully addressed the other four factors, and it has not kept to its scheduled timelines for implementing new management processes that are the foundation of the realignment. Consequently, the department is in danger of not being able to meet its target of completing the realignment in July 2008. In addition, although it has prioritized its implementation of the new management processes, none has yet been implemented. In our recent report, we made six recommendations to ensure that VA's realignment is successfully accomplished; the department generally concurred with our recommendations and stated that it had actions planned to address them. We have identified critical factors that organizations need to address in order to successfully transform an organization to be more results oriented, customer focused, and collaborative in nature. Large- scale change management initiatives are not simple endeavors and require the concentrated efforts of both leadership and employees to realize intended synergies and to accomplish new organizational goals. There are a number of key practices that can serve as the basis for federal agencies to transform their cultures in response to governance challenges, such as those that an organization like VA might face when transforming to a centralized IT management structure. The department has fully addressed two of six critical success factors that we identified (see table 1). Ensuring commitment from top leadership. The department has fully addressed this success factor. As described earlier, the Secretary of VA has fully supported the realignment. He approved the department's new organizational structure and provided resources for the realignment effort. However, the Secretary recently submitted his resignation, indicating that he intended to depart by October 1, 2007. While it is unclear what effect the Secretary's departure will have on the realignment, the impending departure underscores the need for consistent support from top leadership through the implementation of the realignment, to ensure that its success is not at risk in the future. Establishing a governance structure to manage resources. The department has fully addressed this success factor. The department has established three governance boards, which have begun operation. The VA IT Governance Plan, approved April 2007, states that the establishment and operation of these boards will assist in providing the department with more cost-effective use of IT resources and assets. The department also has plans to further enhance the governance structure in response to operational experience. The department found that the boards' responsibilities need to be more clearly defined in the IT Governance Plan to avoid overlap. That is, one board (the Business Needs and Investment Board) was involved in the budget formulation for fiscal year 2009, but budget formulation is also the responsibility of the Deputy Assistant Secretary for IT Resource Management, who is not a member of this board. According to the Principal Deputy Assistant Secretary for Information and Technology, the department is planning to update its IT Governance Plan within a year to include more specificity on the role of the governance boards in VA's budget formulation process. Such an update could further improve the structure's effectiveness. Linking IT strategic plan to organization strategic plan. The department has partially addressed this success factor. VA has drafted an IT Strategic Plan that provides a course of action for the Office of Information and Technology over 5 years and addresses how IT will contribute to the department's strategic plan. According to the Deputy Director of the Quality and Performance Office, the draft IT strategic plan should be formally approved in October 2007. Finalizing the plan is essential to helping ensure that leadership understands the link between VA's organizational direction and how IT is aligned to meet its goals. Using workforce strategic management to identify proper roles for all employees. The department has partially addressed this success factor. The department has begun to identify job requirements, design career paths, and determine recommended training for the staff that were transferred as part of the realignment. According to a VA official, the department identified 21 specialized job activities, such as applications software and end user support, and has defined competency and proficiency targets for 6 of these activities. Also, by November 2007, VA expects to have identified the career paths for approximately 5,000 of the 6,000 staff that have been centralized under the CIO. Along with the development of the competency and proficiency targets, the department has identified recommended training based on grade level. However, the department has not yet established a knowledge and skills inventory to determine what skills are available in order to match roles with qualifications for all employees within the new organization. It is crucial that the department take the remaining steps to fully address this critical success factor, so that the staff transferred to the Office of Information and Technology are placed in positions that best suit their knowledge and skills, and the organization has the personnel resources capable of developing and delivering the services required. Communicating change to all stakeholders. The department has partially addressed this success factor. The department began publishing a bimonthly newsletter in June to better communicate with all staff about Office of Information and Technology activities, including the realignment. However, the department has not yet fully staffed the Business Relationship Management Office or identified its leadership. This office is to serve as the single point of contact between the Office of Information and Technology and the administrations; in this role, it provides the means for the Office of Information and Technology to understand customer requirements, promote services to customers, and monitor the quality of the delivered services. A fully staffed and properly led Business Relationship Management Office is important to ensure effective communication between the Office of Information and Technology and the administrations. Communicating the changed roles and responsibilities of the central IT organization versus the administrations is one of the important functions of the Business Relationship Management Office. These changes are crucial to software development, among other things. Before the centralization of the management structure, each of the administrations was responsible for its own software development. For example, the department's health information system--the Veterans Health Information System and Technology Architecture (VistA)--was developed in a decentralized environment. The developers and the doctors, closely collaborating at local facilities, developed and adapted this system for their own specific clinic needs. The result of their efforts is an electronic medical record that has been fully embraced by the physicians and nurses. However, the decentralized approach has also resulted in each site running a stand-alone version of VistA that is costly to maintain; in addition, data at the sites are not standardized, which impedes the ability to exchange computable information. Under the new organization structure, approval of development changes for VistA will be centralized at the Veterans Health Administration headquarters and then approved for development and implementation by the Office of Information and Technology. The communications role of the Business Relationship Management Office is thus an important part of the processes needed to ensure that users' requirements will be addressed in system development. Dedicating an implementation team to manage change. The department has not addressed this success factor. A dedicated implementation team that is responsible for the day-to-day management of a major change initiative is critical to ensure that the project receives the focused, full-time attention needed to be sustained and successful. VA has not identified such an implementation team to manage the realignment. Rather, the department is currently managing the realignment through two organizations: the Process Improvement Office under the Quality and Performance Office (which will lead process improvements) and the Organizational Management Office (which will advise and assist the CIO during the final transformation to a centralized structure). However, the Executive Director of the Organizational Management Office has recently resigned his position, leaving one of the two responsible offices without leadership. In our view, having a dedicated implementation team to manage major change initiatives is crucial to successful implementation of the realignment. An implementation team can assist in tracking implementation goals and identifying performance shortfalls or schedule slippages. The team could also provide continuity and consistency in the face of any uncertainty that could potentially result from the Secretary's resignation. Accordingly, in our recent report we recommended that the department dedicate an implementation team to be responsible for change management throughout the transformation and that it establish a schedule for the implementation of the management processes. As the foundation for its realignment, VA plans to implement 36 management processes in five key areas: enterprise management, business management, business application management, infrastructure, and service support. These processes, which address all aspects of IT management, were recommended by the department's realignment contractor and are based on industry best practices. According to the contractor, they are a key component of the realignment effort as the Office of Information and Technology moves to a process-based organization. Additionally, the contractor noted that with a system of defined processes, the Office of Information and Technology could quickly and accurately change the way IT supports the department. The department had planned to begin implementing the 36 management processes in March 2007; however, as of early May 2007, it had only begun pilot testing two of these processes. The Deputy Director of the Quality and Performance Office reported that the initial implementation of the first two processes will begin in the second quarter of 2008. The Principal Deputy Assistant Secretary for Information and Technology acknowledged that the department is behind schedule for implementing the processes, but it has prioritized the processes and plans to implement them in three groups, in order of priority (see attachment 1 for a description of the processes and their implementation priority). According to the Deputy Director of the Quality and Performance Office, the approach and schedule for process implementation is currently under review. Work on the 10 processes associated with the first group is under way, and implementation plans and time frames are being revised. This official told us that initial planning meetings have occurred and primary points of contact have been designated for the financial management and portfolio management processes, which are to be implemented as part of the first group. The department also noted that it will work to meet its target date of July 2008 for the realignment, but that all of the processes may not be fully implemented at that time. According to the Principal Deputy Assistant Secretary for Information and Technology, the department has fallen behind schedule with process implementation for two reasons: * The department underestimated the amount of work required to redefine the 36 process areas. Process charters for each of the processes were developed by a VA contractor and provide an outline for operation under the new management structure. Based on its initial review, the department found that the processes are complicated and multilayered, involving multiple organizations. In addition, the contractor provided process charters and descriptions based on a commercial, for-profit business model, and so the department must readjust them to reflect how VA conducts business. * With the exception of IT operations, the Veterans Health Administration operates in a decentralized manner. For example, the budget and spending for the medical centers are under the control of the medical center directors. In addition, the Office of Information and Technology only has ownership over about 30 percent of all activities within the financial management process. For example some elements within this process area (such as tracking and reporting on expenditures) are the responsibility of the department's Office of Management; this office is accountable for VA's entire budget, including IT dollars. Thus, the Office of Information and Technology has no authority to direct the Office of Management to take particular actions to improve specific financial management activities. The department faces the additional obstacle that it has not yet staffed crucial leadership positions that are vital to the implementation of the management processes. As part of the new organizational structure, the department identified 25 offices whose leaders will report to the five deputy assistant secretaries and are responsible for carrying out the new management processes in daily operations. However, as of early September, 7 of the leadership positions for these 25 offices were vacant, and 4 were filled in an acting capacity. According to the Principal Deputy Assistant Secretary for Information and Technology, hiring personnel for senior leadership positions has been more difficult than anticipated. With these leadership positions remaining vacant, the department will face increased difficulties in supporting and sustaining the realignment through to its completion. Until the improved processes have been implemented, IT programs and initiatives will continue to be managed under previously established processes that have resulted in persistent management challenges. Without the standardization that would result from the implementation of the processes, the department risks cost overruns and schedule slippages for current initiatives, such as VistA modernization, for which about $682 million has been expended through fiscal year 2006. Recognizing the importance of securing federal systems and data, Congress passed the Federal Information Security Management Act (FISMA) in December 2002, which sets forth a comprehensive framework for ensuring the effectiveness of information security controls over information resources that support federal operations and assets. Using a risk-based approach to information security management, the act requires each agency to develop, document, and implement an agencywide information security program for the data and systems that support the operations and assets of the agency. According to FISMA, the head of each agency has responsibility for delegating to the agency CIO the authority to ensure compliance with the security requirements in the act. To carry out the CIO's responsibilities in the area, a senior agency official is to be designated chief information security officer (CISO). The May 2006 theft from the home of a VA employee of a computer and external hard drive (which contained personally identifiable information on approximately 26.5 million veterans and U.S. military personnel) prompted Congress to pass the Veterans Benefits, Health Care, and Information Technology Act of 2006. Under the act, the VA's CIO is responsible for establishing, maintaining, and monitoring departmentwide information security policies, procedures, control techniques, training, and inspection requirements as elements of the departmental information security program. The act also includes provisions to further protect veterans and service members from the misuse of their sensitive personally identifiable information. In the event of a security incident involving personally identifiable information, VA is required to conduct a risk analysis, and on the basis of the potential for compromise of personally identifiable information, the department may provide security incident notifications, fraud alerts, credit monitoring services, and identity theft insurance. Congress is to be informed regarding security incidents involving the loss of personally identifiable information. In a report released last week, we stated that although VA has made progress in addressing security weaknesses, it has not yet fully implemented key recommendations to strengthen its information security practices. It has not implemented two of our four previous recommendations and 20 of 22 recommendations made by the department's inspector general. Among the recommendations not implemented are our recommendation that it complete a comprehensive security management program and inspector general recommendations to appropriately restrict access to data, networks, and VA facilities; ensure that only authorized changes are made to computer programs; and strengthen critical infrastructure planning to ensure that information security requirements are addressed. Because these recommendations have not yet been implemented, unnecessary risk exists that personally identifiable information of veterans and other individuals, such as medical providers, will be exposed to data tampering, fraud, and inappropriate disclosure. The need to fully implement GAO and IG recommendations to strengthen information security practices is underscored by the prevalence of security incidents involving the unauthorized disclosure, misuse, or loss of personal information of veterans and other individuals (see table 2). These incidents were partially due to weaknesses in the department's security controls. In these incidents, which include the May 2006 theft of computer equipment from an employee's home (mentioned earlier) and the theft of equipment from department facilities, millions of people had their personal information compromised. While the increase in reported incidents in 2006 reflects a heightened awareness on the part of VA employees of their responsibility to report incidents involving loss of personal information, it also indicates that vulnerabilities remain in security controls designed to adequately safeguard information. Since the May 2006 security incident, VA has begun or has continued several major initiatives to strengthen information security practices and secure personally identifiable information within the department. These initiatives include the realignment of its IT management structure, as discussed earlier. Under the realignment, the management structure for information security has changed. In the new organization, the responsibility for managing the program lies with the CISO/Director of Cyber Security (the CISO position has been vacant since June 2006, with the CIO acting in this capacity), while the responsibility for implementing the program lies with the Director of Field Operations and Security. Thus, responsibility for information security functions within the department is divided. VA officials indicated that the heads of the two organizations are communicating about the department's implementation of security policies and procedures, but this communication is not defined as a role or responsibility for either position in the new management organization book, nor is there a documented process in place to coordinate the management and implementation of the security program. Both of these activities are key security management practices. Without a documented process, policies or procedures could be inconsistently implemented throughout the department, which could prevent the CISO from effectively ensuring departmentwide compliance with FISMA. Until the process and responsibilities for coordinating the management and implementation of IT security policies and procedures throughout the department are clearly documented, VA will have limited assurance that the management and implementation of security policies and procedures are effectively coordinated and communicated. Developing and documenting these policies and procedures are essential for achieving an improved and effective security management process under the new centralized management model. In addition to the realignment initiative, the department also has others under way to address security weaknesses. These include developing an action plan to correct identified weaknesses; establishing an information protection program; improving its incident management capability; and establishing an office to be responsible for oversight of IT within the department. However, implementation shortcomings limit the effectiveness of these initiatives. For example: * VA's action plan has task owners assigned and is updated biweekly, but department officials have not ensured that adequate progress has been made to resolve items in the plan. Specifically, VA has extended the completion date at least once for 38 percent of the plan items, and it did not have a process in place to validate the closure of the items. In addition, although numerous items in the plan were to develop or revise a policy or procedure, 87 percent of these items did not have a corresponding task with an established timeframe for implementation. * VA installed encryption software on laptops at facilities inconsistently; however, VA's directive on encryption did not address the encryption of laptops that were categorized as medical devices, which make up a significant portion of the population of laptops at Veterans Health Administration facilities. In addition, the department has not yet fully implemented the acquisition of software tools across the department. * VA has improved its incident management capability since May 2006 by realigning and consolidating two incident management centers, and made a notable improvement in its notification of major security incidents to US-CERT (the U.S. Computer Emergency Readiness Team), the Secretary, and Congress, but the time it took to send notification letters to individuals was increased for some incidents because VA did not have adequate procedures for coordinating incident response and mitigation activities with other agencies and obtaining up-to-date contact information. * VA established the Office of IT Oversight and Compliance to conduct assessments of its facilities to determine the adequacy of internal controls and investigate compliance with laws, policies, and directives and ensure that proper safeguards are maintained; however, the office lacked a process to ensure that its examination of internal controls is consistent across VA facilities. Until the department addresses recommendations to resolve identified weaknesses and implements the major initiatives it has undertaken, it will have limited assurance that it can protect its systems and information from the unauthorized use, disclosure, disruption, or loss. In our report released last week, we made 17 recommendations to assist the department in improving its ability to protect its information and systems. These recommendations included that VA document clearly define coordination responsibilities for the Director of Field Operations and Security and the Director of Cyber Security and develop and implement a process for these officials to coordinate on the implementation of IT security policies and procedures throughout the department. We also made recommendations to improve the department's ability to protect its information and systems, including the development of various processes and procedures to ensure that tasks in the department's security action plans have time frames for implementation. In summary, effectively instituting a realignment of the Office of Information and Technology is essential to ensuring that VA's IT programs achieve their objectives and that the department has a solid and sustainable approach to managing its IT investments. VA continues to work on improving such programs as information security and systems development. Yet we continue to see management weaknesses in these programs and initiatives (many of a long-standing nature), which are the very weaknesses that VA aims to alleviate with its reorganized management structure. Until the department fully addresses the critical success factors that we identified and carries out its plans to establish a comprehensive set of improved management processes, the impact of this vital undertaking will be diminished. Further, the department may not achieve a solid and sustainable foundation for its new IT management structure. Mr. Chairman and members of the committee, this concludes our statement. We would be happy to respond to any questions that you may have at this time. For more information about this testimony, please contact Valerie C. Melvin at (202) 512-6304 or Gregory C. Wilshusen at (202) 512-6244 or by e-mail at [email protected] or [email protected]. Key contributors to this testimony were made by Barbara Oliver, Assistant Director; Charles Vrabel, Assistant Director; Barbara Collier, Nancy Glover, Valerie Hopkins, Scott Pettis, J. Michael Resser, and Eric Trout. In the following table, the priority group number reflects the order in which the department plans to implement each group of processes, with 1 being the first priority group. 2 Addresses long- and short-term objectives, business direction, and their impact on IT, the IT culture, communications, information, people, processes, technology, development, and partnerships 2 Defines a structure of relationships and processes to direct and control the See note a Identifies potential events that may affect the organization and manages risk to be within acceptable levels so that reasonable assurance is provided regarding the achievement of organization objectives 2 Creates, maintains, promotes, and governs the use of IT architecture models and standards across and within the change programs of an organization 1 Assesses all applications, services, and IT projects that consume resources in order to understand their value to the IT organization 2 Manages the department's information security program, as mandated by the Federal Information Security Management Act (FISMA) of 2002 3 Generates ideas, evaluates and selects ideas, develops and implements innovations, and continuously recognizes innovators and learning from the experience 1 Plans, organizes, monitors, and controls all aspects of a project in a continuous process so that it achieves its objectives 1 Manages and prioritizes all requests for additional and new technology solutions arising from a customer's needs 3 Determines whether and how well customers are satisfied with the services, solutions, and offerings from the providers of IT 1 Provides sound stewardship of the monetary resources of the organization 3 Establishes a pricing mechanism for the IT organization to sell its services to internal or external customers and to administer the contracts associated with the selling of those services 3 Enables the IT organization to understand the marketplace it serves, to identify customers, to "market" to these customers, to generate "marketing" plans for IT services and support the "selling" of IT services to internal customers 2 Ensures adherence with laws and regulations, internal policies and procedures, and stakeholder commitments 1 Maintains information regarding technology assets, including leased and purchased assets, licenses, and inventory 2 Enables an organization to provide the optimal mix of staffing (resources and skills) needed to provide the agreed-on IT services at the agreed-on service levels 2 Manages service-level agreements and performs the ongoing review of service achievements to ensure that the required and cost-justifiable service quality is maintained and gradually improved 1 Ensures that agreed-on IT services continue to support business requirements in the event of a disruption to the business 3 Develops and exercises working relationships between the IT organization and suppliers in order to make available the external services and products that are required to support IT service commitments to customers 3 Promotes an integrated approach to identifying, capturing, evaluating, categorizing, retrieving, and sharing all of an organization's information assets 2 Translates provided customer (business) requirements and IT stakeholder- generated requirements/constraints into solution-specific terms, within the context of a defined solution project or program 1 Creates a documented design from agreed-on solution requirements that describes the behavior of solution elements, the acceptance criteria, and agreed-to measurements 3 Brings together all the elements specified by a solution design via customization, configuration, and integration of created or acquired solution components See note a Validates that the solution components and integrated solutions conform to design specifications and requirements before deployment 2 Addresses the delivery of operational services to IT customers by matching resources to commitments and employing the IT infrastructure to conduct IT operations 3 Ensures that all data required for providing and supporting operational service are available for use and that all data storage facilities can handle normal, expected fluctuations in data volumes and other parameters within their designed tolerances. 3 Identifies and prioritizes infrastructure, service, business and security events, and establishes the appropriate response to those events. 3 Plans, measures, monitors, and continuously strives to improve the availability of the IT infrastructure and supporting organization to ensure that agreed-on requirements are consistently met future identified needs of the business 1 Creates and maintains a physical environment that houses IT resources and optimizes the capabilities and costs of that environment 3 Matches the capacity of the IT services and infrastructure to the current and 1 Manages the life cycle of a change request and activities that measure the effectiveness of the process and provides for its continued enhancement 1 Controls the introduction of releases (that is, changes to hardware and software) into the IT production environment through a strategy that minimizes the risk associated with the changes 1 Identifies, controls, maintains, and verifies the versions of configuration items and their relationships in a logical model of the infrastructure and services 3 Manages each user interaction with the provider of IT service throughout its 2 Restores a service affected by any event that is not part of the standard operation of a service that causes or could cause an interruption to or a reduction in the quality of that service 2 Resolves problems affecting the IT service, both reactively and proactively The department indicated that this process had completed a pilot, but did not assign it to a priority group. 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 Department of Veterans Affairs (VA) has encountered numerous challenges in managing its information technology (IT) and securing its information systems. In October 2005, the department initiated a realignment of its IT program to provide greater authority and accountability over its resources. The May 2006 security incident highlighted the need for additional actions to secure personal information maintained in the department's systems. In this testimony, GAO discusses its recent reporting on VA's realignment effort as well as actions to improve security over its information systems. To prepare this testimony, GAO reviewed its past work on the realignment and on information security, and it updated and supplemented its analysis with interviews of VA officials. VA has fully addressed two of six critical success factors GAO identified as essential to a successful transformation, but it has yet to fully address the other four, and it has not kept to its scheduled timelines for implementing new management processes that are the foundation of the realignment. That is, the department has ensured commitment from top leadership and established a governance structure to manage resources, both of which are critical success factors. However, the department continues to operate without a single, dedicated implementation team to manage the realignment; such a dedicated team is important to oversee the further implementation of the realignment, which is not expected to be complete until July 2008. Other challenges to the success of the realignment include delays in staffing and in implementing improved IT management processes that are to address long-standing weaknesses. The department has not kept pace with its schedule for implementing these processes, having missed its original scheduled time frames. Unless VA dedicates a team to oversee the further implementation of the realignment, including defining and establishing the processes that will enable the department to address its IT management weaknesses, it risks delaying or missing the potential benefits of the realignment. VA has begun or continued several major initiatives to strengthen information security practices and secure personally identifiable information within the department, but more remains to be done. These initiatives include continuing the department's efforts to reorganize its management structure; developing a remedial action plan; establishing an information protection program; improving its incident management capability; and establishing an office responsible for oversight and compliance of IT within the department. However, although these initiatives have led to progress, their implementation has shortcomings. For example, although the management structure for information security has changed under the realignment, improved security management processes have not yet been completely developed and implemented, and responsibility for the department's information security functions is divided between two organizations, with no documented process for the two offices to coordinate with each other. In addition, VA has made limited progress in implementing prior security recommendations made by GAO and the department's Inspector General, having yet to implement 22 of 26 recommendations. Until the department addresses shortcomings in its major security initiatives and implements prior recommendations, it will have limited assurance that it can protect its systems and information from the unauthorized disclosure, misuse, or loss of personally identifiable information.

Since issuing its first loan guarantee in 2009, DOE's Loan Programs Office, which administers the LGP and ATVM program, has issued a total of more than $30 billion in loans and loan guarantees. The LGP was originally designed to address a fundamental impediment to innovative and advanced energy projects: securing funding. Projects that entail risks--either that new technology will not perform as expected or that the borrower or project itself will not perform as expected--can face difficulty securing enough affordable financing to survive the period between development and commercialization of innovative technologies. Because the risks that commercial lenders must assume to support new technologies can put the cost of private financing out of reach, companies may not be able to commercialize innovative technologies without the federal government's financial support. To accurately account for the expected and actual costs of federal loan programs, agencies estimate the costs of a program in accordance with the Federal Credit Reform Act of 1990 by calculating credit subsidy costs for loans and loan guarantees, excluding administrative costs. DOE estimates the credit subsidy cost for each loan or loan guarantee by, among other things, projecting disbursements to the borrower as well as interest and principal repayments from the borrower, and adjusting these projected cash flows for the risk of default and other factors. Paying the credit subsidy cost is either the responsibility of the borrower or the program, depending on whether Congress has provided appropriations to cover such costs. For the LGP, Title XVII of the Energy Policy Act of 2005 (EPAct)-- specifically section 1703--authorized DOE to guarantee loans for energy projects that (1) use new or significantly improved technologies as compared with commercial technologies already in service in the United States and (2) avoid, reduce, or sequester emissions of air pollutants or man-made greenhouse gases. Congress provided DOE $34 billion in loan guarantee authority for section 1703 loan guarantees. Initially, Congress provided no appropriation to cover the credit subsidy costs of loan guarantees under section 1703, requiring all borrowers receiving a loan guarantee to pay to offset the credit subsidy costs of their own projects. In February 2009, Congress passed the American Recovery and Reinvestment Act of 2009 (Recovery Act), which amended Title XVII by adding section 1705, under which DOE could guarantee loans for projects using existing commercial technologies. For section 1705, the Recovery Act provided $2.5 billion to cover credit subsidy costs, which DOE estimated would suffice to cover those costs for about $18 billion in loan guarantees. In April 2011, Congress appropriated $170 million to pay credit subsidy costs for a subset of projects under section 1703, specifically, energy efficiency and renewable energy projects. DOE estimated this appropriation would cover those costs for about $848 million in loan guarantees. As table 1 shows, DOE had about $28.7 billion remaining in loan guarantee authority under section 1703 as of November 2014. At that time, it also had three open solicitations for loan guarantee applications that accounted for much of that remaining authority. The ATVM loan program remains open to applications on a rolling basis and had about $16 billion remaining in loan authority as of November 2014. DOE has made efforts to improve its loan program implementation and oversight and, to date, has taken actions in response to 15 of our 24 prior recommendations. (See app. I for details on the status of each of the 24 recommendations we have made concerning the DOE loan programs). In 2007, 2008, and 2010--which covered the early stages of the LGP--we made 15 recommendations to address numerous issues where DOE had moved forward with the program before key elements were in place. DOE implemented 11 of our 15 recommendations from this period. For example: In our February 2007 report, we found that DOE's actions had focused on expediting program implementation--such as soliciting preapplications for loan guarantees--rather than ensuring the department had in place the critical policies, procedures, and mechanisms necessary to better ensure the program's success. We made five recommendations addressing these concerns. DOE agreed with and implemented all 5 of these recommendations by establishing key policies and procedures and issuing final program regulations, among other things. In contrast, in our July 2010 report, we found that, among other things, DOE had favored some applicants by, for example, deviating from its stated review procedures. DOE did not concur with--and has not taken actions to address--our recommendation that it take steps to ensure that its implementation of the LGP treats applicants consistently. As Congress expanded the DOE loan programs to include 1705 projects and ATVM, we issued additional reports in 2011, 2012, and 2014 highlighting our concerns about DOE making loans and disbursing funds without having sufficient expertise and performance measures, among other things. Our reports included recommendations to address these issues from February 2011 through May 2014. To date, DOE has implemented four of the nine recommendations but has not addressed the remaining five. For example: In February 2011, we found that DOE was using ATVM staff with largely financial, and not technical, expertise to evaluate the progress of projects to produce more fuel-efficient passenger vehicles and their components. We recommended that DOE accelerate efforts to engage sufficient engineering expertise to verify that borrowers are delivering projects as required by the loan agreements. DOE implemented our recommendation by changing its budgeting practices for monitoring ATVM loans to better ensure that funds would be available to engage independent engineering expertise; DOE also changed its policy for engaging technical expertise to align with the Title XVII LGP policy. Also in our February 2011 report, we found that DOE did not have sufficient performance measures that would enable the department to fully assess whether the ATVM program had achieved its program goals, including protecting taxpayers' financial interests. We recommended that DOE develop sufficient and quantifiable performance measures for its program goals. DOE disagreed with this recommendation and took no steps to implement it. As a result, Congress does not have important information on whether the funds DOE has spent so far are furthering the program's goals and, consequently, whether the program warrants continued support. DOE generally agreed with most of the additional recommendations we made in our March 2012 and May 2014 reports as the programs expanded, but it has not fully implemented them. For example, in May 2014 we found that DOE adhered to its monitoring policies inconsistently or not at all because the Loan Programs Office was still developing its organizational structure, including its staffing. We recommended that DOE fully develop its organizational structure by staffing key loan monitoring positions, among other things. DOE agreed and has taken steps to identify key staffing positions but, as of February 2016, most of these positions remain unfilled. Filling these positions would help DOE carry out activities critical to monitoring these loans. In our April 2015 report, we found that DOE estimated the credit subsidy costs of the loans and loan guarantees in its portfolio to be about $2.2 billion as of November 2014, including about $807 million for five loans on which the borrowers had defaulted. At that time, the portfolio consisted of 34 loans and loan guarantees in support of 30 projects in a diverse array of technologies. We also found that administrative costs totaled about $312 million from fiscal year 2008 through fiscal year 2014. The estimated $2.2 billion in credit subsidy costs was a decrease from initial DOE estimates totaling about $4.5 billion, and we found that changes in credit subsidy cost estimates varied by loan program and the type of technology supported by the loans and loan guarantees, and by other factors, such as the availability of a steady stream of revenue for a project. Specifically, defaults on loan guarantees for two solar manufacturing projects and one energy storage project were largely responsible for an increase in the credit subsidy cost estimate for DOE's LGP portfolio from $1.33 billion (when the loan guarantees were issued) to $1.81 billion as of November 2014. Borrowers also defaulted on two ATVM loans, but the credit subsidy cost estimate for DOE's ATVM loan program's portfolio decreased from initial DOE estimates totaling about $3.16 billion to $404 million as of November 2014, mainly because of a significant improvement in the credit rating of one loan. This decrease was enough to more than offset the increases from the defaults in DOE's overall loan portfolio. See table 2 for changes in DOE's credit subsidy cost estimates. We found in our April 2015 report that most projects in DOE's portfolio have completed construction and are in operation--producing power or automobiles, for instance. None of the projects with loans in default had revenue streams that were provided for under long-term contracts for the sale of energy produced by the project pursuant to a power purchase agreement, offtake agreement, or similar contractual language. Power purchase agreements and offtake agreements generally guarantee a stream of revenue to the project owner for 20 or 25 years after the project begins generating electricity, effectively ensuring a buyer for the produced power. In DOE's portfolio, 21 of the 30 projects supported by the program included power purchase or offtake agreements. Regarding administrative costs, our April 2015 report found that such costs for the programs have totaled about $312 million from fiscal year 2008 through fiscal year 2014, including approximately $251.6 million for LGP and $60.6 million for the ATVM loan program. We also found that, for the LGP, the fees DOE has collected have not been sufficient to cover all of its administrative expenses for the program, in part because the maintenance fees on the current loan guarantees were too low to cover ongoing monitoring costs. As a result, some of the administrative expenses have been paid with taxpayer funds. DOE addressed the low maintenance fee levels by changing the fee structure in its new solicitations, announced from December 2013 to December 2014, to allow increased maintenance fees--up to $500,000 per year. DOE officials told us that the new fee structure should allow DOE to cover a greater portion of LGP monitoring costs on new loan guarantees. However, the actual fee amounts will depend on the individual loan guarantees and negotiation of the loan guarantee agreements, making predictions of future fee income a challenge. It is now too early to tell whether DOE's actions will result in sufficient funds to offset LGP's future administrative costs. Chairmen Weber and Loudermilk, Ranking Members Grayson and Beyer, 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 or your staff members have any future questions about this testimony, 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 statement. Key contributors to this testimony include Karla Springer, Assistant Director; Michael Krafve; Cynthia Norris; Barbara Timmerman; and Jarrod West. GAO-07-339R Recommendation The Secretary of Energy should ensure that the department, before selecting eligible projects for loan guarantees, establishes policies and procedures to account for loan guarantees. Action taken In May 2007, the Department of Energy (DOE) implemented this recommendation when its Office of Finance and Accounting established standard operating procedures for accounting and reporting for DOE loan programs (SOP 1.4). Among other things, the procedures enable DOE to account for payments received from applicants for administrative costs, which is important because the Energy Policy Act of 2005, which established the Loan Guarantee Program (LGP), requires that borrowers be charged fees to cover DOE's costs to administer the program. DOE established the procedures before it issued the first loan guarantee in 2010, meeting the intent of our recommendation. The Secretary of Energy should ensure that the department, before selecting eligible projects for loan guarantees, establishes policies and procedures for developing subsidy and administrative cost estimates. In March 2009, DOE issued a Credit Policies and Procedures Manual that lays out policies and procedures for estimating subsidy costs and defines administrative costs. In addition, according to DOE, in November 2008 the Office of Management and Budget approved the LGP's model for calculating the credit subsidy costs of loan guarantees. DOE's solicitations describe how it will charge these administrative costs to applicants. These actions meet the intent of our recommendation. The Secretary of Energy should ensure that the department, before selecting eligible projects for loan guarantees, establishes policies and procedures for selecting lenders and loans to guarantee and for monitoring lenders and loans once the guarantees have been issued. Closed - Implemented DOE satisfied our recommendation to establish policies and procedures for selecting lenders and loans to guarantee and for monitoring lenders and loans once the guarantees have been issued. On October 23, 2007, and December 4, 2009, DOE issued final rules that incorporated policies and procedures for the issuance of solicitations, submission of applications, and the evaluation of loan guarantee applications. The rules also lay out the requirements for eligible lenders. In addition, on March 5, 2009, DOE issued a credit policies and procedures manual for the program that provides further detail on policies and procedures for selecting lenders and loans to guarantee. The manual also provides policies and procedures for credit monitoring of projects once loan guarantees have been issued. The Secretary of Energy should ensure that the department, before selecting eligible projects for loan guarantees, issues final program regulations that protect the government's interests, manage risk, and ensure that borrowers are aware of program requirements. Closed - Implemented On October 23, 2007, and December 4, 2009, DOE issued final rules implementing its Title XVII LGP for innovative energy technologies. The rules elaborate on the program established by Title XVII by defining the technologies and types of projects covered by the program, as well as the financial structure required for projects. Issuing a rule is in keeping with the intent of our recommendation to provide greater protection of the government's interests because this rule, like other regulations, cannot be changed without public or congressional input and carries the force of law. The Secretary of Energy should ensure that the department, before selecting eligible projects for loan guarantees, further defines program goals and objectives tied to outcome measures for determining program effectiveness. GAO-08-750 Recommendation The Secretary of Energy should direct the Chief Financial Officer to amend application guidance to clarify the program's equity requirements to the 16 companies invited to apply for loan guarantees and in future solicitations before substantially reviewing LGP applications. Closed - Implemented DOE has taken actions to define program goals and performance measures in order to determine program effectiveness. Status Closed - Implemented DOE substantively addressed our recommendation with its October 2009 and August 2010 solicitations, which provided an expanded definition of equity that also addressed exclusions. The Secretary of Energy should direct the Chief Financial Officer to amend application guidance to further develop and define performance measures and metrics to monitor and evaluate program efficiency, effectiveness, and outcomes before substantially reviewing LGP applications. Closed - Implemented Since our 2008 recommendation, DOE developed nine performance measures to evaluate the program's efficiency and outcomes, implementing our recommendation. The Secretary of Energy should direct the Chief Financial Officer to amend application guidance to improve the LGP's full tracking of the program's administrative costs by developing an approach to track and estimate costs associated with offices that directly and indirectly support the program and including those costs as appropriate in the fees charged to applicants before substantially reviewing LGP applications. In October 2008, the Loans Programs Office (LPO) began using a DOE software system to track administrative costs within the office, including, for example, staff salaries and travel associated with reviewing the applications for various solicitations. In addition, DOE staff in the field office that was reviewing the greatest number of loan guarantee applications reached an agreement with the program concerning performance of and reimbursement for this work. The Secretary of Energy should direct the Chief Financial Officer to amend application guidance to include more specificity on the content of independent engineering reports and on the development of project cost estimates to provide the level of detail needed to better assess overall project feasibility before substantially reviewing LGP applications. Since our 2008 recommendation, DOE increased the content guidelines for engineering reports in later solicitations, partly implementing our recommendation. However, the actions taken by DOE did not fully address the intent of our recommendation. The Secretary of Energy should direct the Chief Financial Officer to clearly define needs for contractor expertise to facilitate timely application reviews before substantially reviewing LGP applications. Closed - Implemented To facilitate timely action on applications for loan guarantees, DOE developed "standing source" lists of contractors with legal, engineering, financial, and marketing expertise. Listed contractors were determined by DOE to be capable of providing specific services that DOE identified. Such contractors were available for selection, under a competitive process, to review projects under consideration for loan guarantees. Developing the standing list helped ensure that DOE would have the necessary expertise readily available during the review process. The Secretary of Energy should direct the Chief Financial Officer to complete detailed internal loan selection policies and procedures that lay out roles and responsibilities and criteria and requirements for conducting and documenting analyses and decision making before substantially reviewing LGP applications. In March 2009, DOE issued a Credit Policies and Procedures Manual that established detailed internal loan selection policies and procedures, including roles and responsibilities for LGP staff, and criteria for conducting analyses and decision making, but the manual did not provide detailed guidance for documenting analyses. In October 2011, LGP revised its Credit Policies and Procedures manual to also include specific instructions to LGP staff to document their analyses and decisions in LGP's records management system. GAO-10-627 Recommendation The Secretary of Energy should direct the program management to develop relevant performance goals that reflect the full range of policy goals and activities for the program, and to the extent necessary, revise the performance measures to align with these goals. Action taken According to DOE officials, LGP adheres to and supports the current DOE Strategic Plan. However, LGP could not provide documentation or evidence of either an improvement in alignment between DOE performance goals and LGP policy goals or the revision of LGP performance measures. We continue to believe that relevant and revised performance goals and measures would improve DOE's ability to evaluate and implement the LGP. The Secretary of Energy should direct the program management to revise the process for issuing loan guarantees to clearly establish what circumstances warrant disparate treatment of applicants so that DOE's implementation of the program treats applicants consistently unless there are clear and compelling grounds for doing otherwise. DOE did not concur with the recommendation and has not taken action to implement it. The Secretary of Energy should direct the program management to develop an administrative appeal process for applicants who believe their applications were rejected in error and document the basis for conclusions regarding appeals. DOE did not concur with the recommendation and has not taken action to implement it. The Secretary of Energy should direct the program management to develop a mechanism to systematically obtain and address feedback from program applicants, and, in so doing, ensure that applicants' anonymity can be maintained, for example, by using an independent service to obtain the feedback. GAO-11-145 Recommendation The Secretary of Energy should direct the ATVM Program Office to accelerate efforts to engage sufficient engineering expertise to verify that borrowers are delivering projects as agreed. In September 2010, DOE created a mechanism for submitting feedback--including anonymous feedback-- through its website. Status Closed - Implemented Since issuance of our report in February 2011, DOE changed its budgeting practices for monitoring ATVM loans to better ensure that funds would be available to engage independent engineering expertise when needed. DOE also changed its policy for engaging technical expertise, making it the same as for the Title XVII LGP. The Secretary of Energy should direct the ATVM Program Office to develop sufficient and quantifiable performance measures for its three goals. In its original comments to our report, and in a subsequent statement of its management decisions, DOE stated that it disagreed with our recommendation. DOE stated its belief that the ATVM program adhered to the requirements of the statute authorizing the program and that the performance measures we suggested would greatly expand the scope of the program--DOE stated it would not develop any new measures not specified by Congress. GAO-12-157 Recommendation The Secretary of Energy should direct the Executive Director of the Loan Programs Office to commit to a timetable to fully implement a consolidated system that enables the tracking of the status of applications and that measures overall program performance. Action taken DOE did not concur with the recommendation and has not taken action to implement it. The Secretary of Energy should direct the Executive Director of the Loan Programs Office to ensure that the new records management system contains documents supporting past decisions, as well as those in the future. DOE concurred with this recommendation but has not provided us with information regarding its implementation. The Secretary of Energy should direct the Executive Director of the Loan Programs Office to regularly update the LGP's credit policies and procedures manual to reflect current program practices to help ensure consistent treatment for applications to the program. In December 2015, DOE published its revised LPO credit policies and procedures manual, which sets the basic criteria for the determination of eligibility, underwriting of loan and loan guarantee requests, and the management of closed loans and loan guarantees. GAO-14-367 Recommendation The Secretary of Energy should direct the Executive Director of the Loan Programs Office to fully develop its organizational structure by staffing key monitoring positions. Action taken DOE officials told us that they developed short- and long-term plans for staffing key loan monitoring positions and risk mitigation positions within the Portfolio Management Division and Risk Management Division, respectively. In February 2016, DOE provided us with evidence that it had identified 24 key positions in these two divisions; however, most of these positions remain unfilled, so the recommendation status remains open. The Secretary of Energy should direct the Executive Director of the Loan Programs Office to fully develop its organizational structure by updating management and reporting software. In February 2016, DOE officials provided us with evidence that they had completed and implemented updates for their management and reporting systems. The Secretary of Energy should direct the Executive Director of the Loan Programs Office to fully develop its organizational structure by completing policies and procedures for loan monitoring and risk management. In February 2016, DOE officials provided us with evidence that they developed, revised, reviewed, and implemented the majority of their portfolio monitoring and risk management policies and procedures. However, some key work processes (e.g., Alleged Fraud, Waste, or Abuse reporting and Risk Assessment processes) are still under development, so the recommendation status remains open. The Secretary of Energy should direct the Executive Director of the Loan Programs Office to evaluate the effectiveness of DOE's monitoring by performing the credit review, compliance, and reporting functions outlined in the 2011 policy manual for DOE's loan programs. In February 2016, DOE officials told us that the Risk Management Division evaluates the effectiveness of DOE's monitoring via annual internal assessments. DOE began the first of these annual assessments in October 2015 and provided GAO with updated procedures for conducting these assessments. DOE Loan Programs: Current Estimated Net Costs Include $2.2 Billion in Credit Subsidy, Plus Administrative Expenses. GAO-15-438. Washington, D.C.: April 27, 2015. DOE Loan Programs: DOE Has Made More Than $30 Billion in Loans and Guarantees and Needs to Fully Develop Its Loan Monitoring Function. GAO-14-645T. Washington, D.C.: May 30, 2014. DOE Loan Programs: DOE Should Fully Develop Its Loan Monitoring Function and Evaluate Its Effectiveness. GAO-14-367. Washington, D.C.: May 1, 2014. Federal Support for Renewable and Advanced Energy Technologies. GAO-13-514T. Washington, D.C.: April 16, 2013. Department of Energy: Status of Loan Programs. GAO-13-331R. Washington, D.C.: March 15, 2013. DOE Loan Guarantees: Further Actions Are Needed to Improve Tracking and Review of Applications. GAO-12-157. Washington, D.C.: March 12, 2012. Department of Energy: Advanced Technology Vehicle Loan Program Implementation Is Under Way, but Enhanced Technical Oversight and Performance Measures Are Needed. GAO-11-145. Washington, D.C.: February 28, 2011. Department of Energy: Further Actions Are Needed to Improve DOE's Ability to Evaluate and Implement the Loan Guarantee Program. GAO-10-627. Washington, D.C.: July 12, 2010. Department of Energy: New Loan Guarantee Program Should Complete Activities Necessary for Effective and Accountable Program Management. GAO-08-750. Washington, D.C.: July 7, 2008. Department of Energy: Observations on Actions to Implement the New Loan Guarantee Program for Innovative Technologies. GAO-07-798T. Washington, D.C.: April 24, 2007. The Department of Energy: Key Steps Needed to Help Ensure the Success of the New Loan Guarantee Program for Innovative Technologies by Better Managing Its Financial Risk. GAO-07-339R. Washington, D.C.: February 28, 2007. 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.

DOE's Loan Programs Office administers the LGP for certain renewable or innovative energy projects and the ATVM loan program for projects to produce more fuel-efficient vehicles and components. Both programs can expose the government to substantial financial risks if borrowers default. DOE considers these risks in calculating credit subsidy costs. The law requires that the credit subsidy costs of DOE loans and loan guarantees be paid for by appropriations, borrowers, or some combination of both. This testimony summarizes (1) DOE's progress in addressing GAO's prior recommendations related to the implementation and oversight of its loan programs and (2) GAO's 2015 report on the credit subsidy costs of the DOE loan programs. This statement is based on a body of work that GAO completed between February 2007 and April 2015. GAO made numerous recommendations in these reports and obtained updates from agency officials. GAO is not making any new recommendations in this testimony. The Department of Energy (DOE) has made efforts to improve the implementation and oversight of its loan programs and, to date, has taken actions to address 15 of 24 of GAO's prior related recommendations. DOE's Loan Guarantee Program (LGP), authorized by Congress in 2005, was designed to encourage certain types of energy projects (e.g., nuclear, solar, and wind generation; solar manufacturing; and energy transmission) by agreeing to reimburse lenders for the guaranteed amount of loans if the borrowers default. DOE's Advanced Technology Vehicles Manufacturing (ATVM) loan program, authorized by Congress in 2007, was designed to encourage the automotive industry to invest in technologies to produce more fuel-efficient vehicles and their components. In 2007, 2008, and 2010--which covered the early stages of the LGP--GAO made 15 recommendations to address numerous concerns where DOE had moved forward with that program before key elements were in place. For example, in its February 2007 report, GAO found that DOE's actions had focused on expediting program implementation--such as soliciting preapplications for loan guarantees--rather than ensuring the department had in place the critical policies, procedures, and mechanisms needed to better ensure the program's success. DOE has implemented 11 of the 15 recommendations. In 2011, 2012, and 2014, as Congress expanded the loan programs, GAO made 9 additional recommendations to address concerns about DOE making loans and disbursing funds without having sufficient engineering expertise, sufficient and quantifiable performance measures for assessing program progress, or a fully developed loan monitoring function, among other things. Although DOE generally agreed with most of the 9 recommendations, to date it has implemented only 4 of them. In an April 2015 report, GAO found that DOE estimated the credit subsidy costs of the loans and loan guarantees in its portfolio--that is, the total expected net cost to the government over the life of the loans--to be about $2.2 billion as of November 2014, including about $807 million for five loans on which borrowers had defaulted. The estimated $2.2 billion in credit subsidy costs was a decrease from DOE's initial estimates totaling about $4.5 billion. GAO found that changes in credit subsidy cost estimates varied by loan program and the type of technology supported by the loans and loan guarantees, among other factors. Specifically, defaults on loan guarantees for two solar manufacturing projects and one energy storage project were largely responsible for an increase in the credit subsidy cost estimate for the LGP's portfolio from $1.33 billion when the loan guarantees were issued to $1.81 billion as of November 2014. Borrowers also defaulted on two ATVM loans, but the credit subsidy cost estimate for the ATVM loan program's portfolio decreased from $3.16 billion to $404 million as of November 2014, mainly because of a significant improvement in the credit rating of one loan. In DOE's portfolio, 21 of the 30 projects had guaranteed revenue streams provided for under a long-term contract, such as a power purchase agreement, but none of the five defaulted loans supported projects with such a contract. GAO also found that administrative costs of the loan programs totaled about $312 million from fiscal year 2008 through fiscal year 2014; these costs are not included in credit subsidy costs.

For further information regarding this testimony, please contact Seto J. Bagdoyan, (202) 512-6722 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 testimony are Cindy Brown Barnes (Director), Tonita Gillich (Assistant Director), Holly Dye, Erin Godtland, Joel Green, and Erin McLaughlin. 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 summarizes the information contained in GAO's April 2017 report, entitled SSA Disability Benefits: Comprehensive Strategic Approach Needed to Enhance Antifraud Activities ( GAO-17-228 ). The Social Security Administration (SSA) has taken steps to establish an organizational culture and structure conducive to fraud risk management in its disability programs, but its new antifraud office is still evolving. In recent years, SSA instituted mandatory antifraud training, established a centralized antifraud office to coordinate and oversee the agency's fraud risk management activities, and communicated the importance of antifraud efforts. These actions are generally consistent with GAO's Fraud Risk Framework, a set of leading practices that can serve as a guide for program managers to use when developing antifraud efforts in a strategic way. However, SSA's new antifraud office, the Office of Anti-Fraud Programs (OAFP), faced challenges establishing itself as the coordinating body for the agency's antifraud initiatives. For example, the OAFP has had multiple acting leaders, but SSA recently appointed a permanent leader of OAFP to provide accountability for the agency's antifraud activities. SSA has taken steps to identify and address fraud risks in its disability programs, but it has not yet comprehensively assessed these fraud risks or developed a strategic approach to help ensure its antifraud activities effectively mitigate those risks. Over the last year, SSA gathered information about fraud risks, but these efforts generally have not been systematic and did not assess the likelihood, impact, or significance of all risks that were identified. SSA also has several prevention and detection activities in place to address known fraud risks in its disability programs such as fraud examination units, which review disability claims to help detect fraud perpetrated by third parties. However, SSA has not developed and documented an overall antifraud strategy that aligns its antifraud activities to its fraud risks. Leading practices call for federal program managers to conduct a fraud risk assessment and develop a strategy to address identified fraud risks. Without conducting a fraud risk assessment that aligns with leading practices and developing an antifraud strategy, SSA's disability programs may remain vulnerable to new fraud schemes, and SSA will not be able to effectively prioritize its antifraud activities. SSA monitors its antifraud activities through the OAFP and its National Anti-Fraud Committee (NAFC), which serves as an advisory board to the OAFP, but the agency does not have effective performance metrics to evaluate the effect of such activities. The OAFP has responsibility for monitoring SSA's antifraud activities and establishing performance and outcome-oriented goals for them. It collects metrics to inform reports about its antifraud initiatives, and the NAFC receives regular updates about antifraud initiatives. However, the quality of the metrics varies across initiatives and some initiatives do not have metrics. Of the 17 initiatives listed in SSA's 2015 report on antifraud initiatives, 10 had metrics that did not focus on outcomes, and 4 did not have any metrics. For example, SSA lacks a metric to help monitor the effectiveness of its fraud examination units. Leading practices in fraud risk management call for managers to monitor and evaluate antifraud initiatives with a focus on measuring outcomes. Without outcome-oriented performance metrics, SSA may not be able to evaluate its antifraud activities, review progress, and determine whether changes are necessary.

Medicare and Medicaid have consistently been targets for fraudulent conduct because of their size and complexity. Private health care insurance carriers are also vulnerable to fraud due to the immense volume of claims they receive and process. Those who commit fraud against public health insurers are also likely to engage in similar conduct against private insurers. The Coalition Against Insurance Fraud estimates that in 1997 fraud in the health care industry totaled about $54 billion nationwide, with $20 billion attributable to private insurers and $34 billion to Medicare and Medicaid. In addition to losses due to fraud, the Department of Health and Human Services' OIG has reported that billing errors, or mistakes, made by health care providers were significant contributors to improperly paid health care insurance claims. The OIG defined billing errors as (1) providing insufficient or no documentation, (2) reporting incorrect codes for medical services and procedures performed, and (3) billing for services that are not medically necessary or that are not covered. For fiscal year 2000, the OIG reported that an estimated $11.9 billion in improper payments were made for Medicare claims. In a March 1997 letter to health care providers, the Department of Health and Human Services' IG suggested that providers work cooperatively with the OIG to show that compliance can become a part of the provider culture. The letter emphasized that such cooperation would ensure the success of initiatives to identify and penalize dishonest providers. One cooperative effort between the IG and health care groups resulted in the publication of model compliance programs for health care providers. The OIG encourages providers to adopt compliance principles in their practice and has published specific guidance for individual and small group physician practices as well as other types of providers to help them design voluntary compliance programs. A voluntary compliance program can help providers recognize when their practice has submitted erroneous claims and ensure that the claims they submit are true and accurate. In addition, the OIG has incorporated its voluntary self-disclosure protocolinto the compliance program, under which sanctions may be mitigated if provider-detected violations are reported voluntarily. Evaluation and management services refer to work that does not involve a medical procedure--the thinking part of medicine. The key elements involved in evaluation and management services are (1) obtaining the patient's medical history, (2) performing a physical examination, and (3) making medical decisions. Medical decisions include determining which diagnostic tests are needed, interpreting the results of the diagnostic tests, making the diagnosis, and choosing a course of treatment after discussing the risks and benefits of various treatment options with the patient. These decisions might involve work of low, medium, or high complexity. Each of the key elements of evaluation and management services contains components that indicate the amount of work done. For example, a comprehensive medical history would involve (1) determining a patient's chief complaint, (2) tracing the complete history of the patient's present illness, (3) questioning other observable characteristics of the patient's present condition and overall state of health (review of systems), (4) obtaining a complete medical history for the patient, (5) developing complete information on the patient's social history, and (6) recording a complete family history. A more focused medical history would involve obtaining only specific information relating directly to the patient's symptoms at the time of the visit. Providers and their staffs use identifying codes defined in an American Medical Association publication, titled Current Procedural Terminology (CPT), to bill for outpatient evaluation and management services performed during office visits. The CPT is a list of descriptive terms and identifying codes for reporting all standard medical services and procedures performed by physicians. Updated annually, it is the most widely accepted nomenclature for reporting physician procedures and services under both government and private health insurance programs. The CPT codes reported to insurers are used in claims processing, and they form the basis for compensating providers commensurate with the level of work involved in treating a patient. Accordingly, the higher codes, which correspond to higher payments, are used when a patient's problems are numerous or complex or pose greater risk to the patient, or when there are more diagnostic decisions to be made or more treatment options to be evaluated. The CPT has two series of evaluation and management codes for outpatient office visits, one series for new patient visits and another for established patient visits. Each series of CPT codes has five levels that correspond to the difficulty and complexity of the work required to address a patient's needs. The code selected by the provider to describe the services performed in turn determines the amount the provider will be paid for the visit. For example, under the current Medicare fee schedule for the District of Columbia and surrounding suburbs, a provider would be paid $39.30 for a new patient who is determined to have received services commensurate with a level 1 visit and $182.52 for a level 5 visit. Similarly, payments for level 1 and level 5 visits by an established patient are $22.34 and $128.03, respectively. The two workshops we attended provided certain advice that is inconsistent with the OIG guidance and that, if followed, could result in violations of criminal and civil statutes. Specifically, at one workshop the consultant suggested that when providers identify an overpayment from an insurance carrier, they should not report or refund the overpayment. Furthermore, consultants at both workshops suggested that providers attempt to receive a higher-than-earned level of compensation by making it appear, through documentation, that a patient presented more complex problems than he or she actually did. Additionally, one consultant suggested that providers limit the services offered to patients with low- paying insurance plans, such as Medicaid, and that they discourage such patients from using the provider's services by offering appointments to them only in time slots that are inconvenient to other patients. One workshop focused on the merits of implementing voluntary compliance programs. The consultant who presented this particular discussion explained that a baseline self-audit to determine the level of compliance with applicable laws, rules, and regulations is a required step in creating a voluntary compliance program. Focusing on "how to audit- proof your practice" and avoid sending out "red flags," the consultant advised providers not to report or refund overpayments they identify as a result of the self-audit. The consultant claimed that reporting or refunding the overpayment would raise a red flag that could result in an audit or investigation. When asked the proper course of action to take when an overpayment is identified, the consultant responded that providers are required to report and refund overpayments. He said, however, that instead of refunding overpayments, physician practices generally fix problems in their billing systems that cause overpayments while "keeping their mouths shut" and "getting on with life." Such conduct, however, could result in violations of criminal statutes. According to the most recent OIG Medicare audit report, the practice of billing for services that are not medically necessary or that lack sufficient diagnostic justification is a serious problem in the health insurance system. The OIG estimated that during fiscal year 2000, $5.1 billion was billed to insurance plans for unnecessary services. Intentionally billing for services that are not medically necessary may result in violations of law. Moreover, based on advice given at workshops that we attended during this investigation, we are concerned that insurers may be paying for tests and procedures that are not medically necessary because physicians may be intentionally using such services to justify billing for evaluation and management services at higher code levels than actual circumstances warrant. Specifically, two consultants advised that documentation of evaluation and management services performed can be used to create, for purposes of an audit, the appearance that medical issues confronted at the time of a patient's office visit were of a higher level of difficulty than they actually were. For example, a consultant at one workshop urged practitioners to enhance revenues by finding creative ways to justify bills for patient evaluation and management services at high code levels. He advised that one means of justifying bills at high code levels is to have nonphysician health professionals perform numerous procedures and tests. To illustrate his point, the consultant discussed the hypothetical case of a cardiologist who examines a patient in an emergency room where tests are performed and the patient is discharged after the cardiologist determines that the patient has a minor problem or no problem at all. To generate additional revenue, the consultant suggested that the cardiologist tell the patient to come to his office for a complete work-up, even when the cardiologist knows that the patient does not have a problem. He advised that the work-up be performed during two separate office visits and that the cardiologist not be involved in the first visit. Instead, a nurse is to perform tests, draw blood, and take a medical history. During the second visit, the cardiologist is to consult with the patient to discuss the results of the tests and issues such as life style. The consultant indicated that the cardiologist could bill for a level 4 visit, indicating that a relatively complex medical problem was encountered at the time of the visit. The consultant made clear that the cardiologist did not actually confront a complex problem during the visit because the cardiologist already knew, based on the emergency room tests and examination, that the patient did not have such a problem. Another consultant focused on how to develop the highest code level for health care services and create documentation to avoid having an insurer change the code to a lower one. The consultant engaged in "exercises" with participants designed to suggest that coding results are "arbitrary" determinations. His emphasis was not that the code selection be correct or even that the services be performed, but rather that it is important to create a documentary basis for the codes billed in the event of an audit. He explained that in the event of an audit, the documentation created is the support for billing for services at higher code levels than warranted. During the exercises, program participants--all were physicians except for our criminal investigator--were provided a case study of an encounter with a generally healthy 14-year-old patient with a sore throat. Participants were asked to develop the evaluation and management service code for the visit that diagnosed and treated the patient's laryngitis. The consultant suggested billing the visit as a level 4 encounter, supporting the code selection by documenting every aspect of the medical history and physical examination, and mechanically counting up the work documented to make the services performed appear more complicated than they actually were. All of the participants indicated that they would have coded the visit at a lower level than that suggested by the consultant, who stated that "documentation has its rewards." The consultant explained that in the event of an audit, the documentation created would be the basis for making it appear that a bill at a high code level was appropriate. One workshop consultant encouraged practices to differentiate between patients based on the level of benefits paid by their insurance plans. He identified the Medicaid program in particular as being the lowest and slowest payer, and urged the audience to stop accepting new Medicaid patients altogether. The consultant also suggested that the audience members limit the services they provide to established Medicaid patients and offer appointments to them only in hard-to-fill time slots. Workshop participants were advised to offer better-insured patients follow-up services that are intended to affiliate a patient permanently with the practice. However, the consultant suggested that physicians may decide not to offer such services to Medicaid patients. He sent a clear message to his audience that a patient's level of care should be commensurate with the level of insurance benefits available to the patient. This advice raises two questions: First, are medically necessary services not being made available to Medicaid patients? Second, are better-paying insurance plans being billed for services that are not medically necessary but performed for the purpose of affiliating patients from such plans to a medical practice? Program participants were further urged to see at least one new patient with a better-paying insurance plan each day. The consultant pointed out that, by seeing one new patient per day, a provider can increase revenue by $6,000 per year because the fee for a new patient visit is about $30 more than the fee for an established patient visit. He said that over time such measures would result in reducing the percentage of Medicaid patients seen regularly in the practice and increase the number of established patients with better-paying insurance. The consultant also recommended that providers limit the number of scheduled appointment slots available to Medicaid patients on any given day and that Medicaid patients be offered appointments only in hard-to-fill time slots rather than in the "best," or convenient, time slots. He suggested that insurance information and new patient status be used to allocate the best time slots to the best payers. He identified this approach as "rationing," which he described as "not real discrimination," but "somewhat discrimination." While neither the Social Security Act nor Medicaid regulations require physicians to accept Medicaid patients, title VI of the Civil Rights Act of 1964 prohibits discrimination based upon race, color, or national origin in programs that receive federal financial assistance. The Department of Health and Human Services, which administers the Medicare and Medicaid programs, takes the position that the nondiscrimination requirement of title VI applies to doctors in private offices who treat and bill for Medicaid patients. While the conduct promoted by the consultant is not overt discrimination on the basis of race, color, or national origin, under certain circumstances, such conduct might disproportionately harm members of protected groups and raise questions about title VI compliance. Moreover, even if the conduct promoted is not unlawful, it raises serious concerns about whether it would result in depriving Medicaid patients of medically necessary services, and whether better-paying insurance plans are billed for services that are not medically necessary but performed for the purpose of affiliating patients to a particular medical practice. Advice offered to providers at workshops and seminars has the potential for easing program integrity problems in the Medicare and Medicaid programs by providing guidance on billing codes for evaluation and management services. However, if followed, the advice provided at two workshops we attended would exacerbate integrity problems and result in unlawful conduct. Moreover, the advice raises concerns that some payments classified by the OIG as improperly paid health care insurance claims may stem from conscious decisions to submit inflated claims in an attempt to increase revenue. We have discussed with the Department of Health and Human Services' OIG the need to monitor workshops and seminars similar to the ones we attended. As arranged with your office, unless you 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 make copies of the report available to interested congressional committees and the Secretary of the Department of Health and Human Services. This report will also be available at www.gao.gov. If you have any questions about this investigation, please call me at (202) 512-7455 or Assistant Director William Hamel at (202) 512-6722. Senior Analyst Shelia James, Assistant General Counsel Robert Cramer, and Senior Attorney Margaret Armen made key contributions to this report.

This report investigates health care consultants who conduct seminars or workshops that offer advice to health care providers on ways to enhance revenue and avoid audits or investigations. GAO attended several seminars and workshops offered by these consultants. GAO sought to determine whether the consultants were providing advice that could result in improper or excessive claims to Medicare, Medicaid, other federally funded health plans, and private health insurance carriers. GAO found that some advice was inconsistent with guidance provided by the Department of Health and Human Services' Office of Inspector General (OIG). Such advice could result in violations of both civil and criminal statutes.

In accordance with the Federal Records Act and NARA's implementing regulations for records management and retention, MCC is responsible for managing the records that it generates. MCC has established policies and issued guidance intended to ensure that the records generated by the governments receiving compact and threshold assistance are properly identified and transferred to MCC for storage and management. The Federal Records Act, as amended, requires each federal agency to make and preserve records that (1) document the organization, functions, policies, decisions, procedures, and essential transactions of the agency; and (2) provide the information necessary to protect the legal and financial rights of the government and of persons directly affected by the agency's activities. Such records must be managed and preserved in accordance with the act's provisions. To ensure that they have appropriate systems for managing and preserving their records, the act requires agencies to develop records management programs. These programs are intended, among other things, to provide for accurate and complete documentation of the policies and transactions of each federal agency, to control the quality and quantity of records they produce, and to provide for judicious preservation and disposal of federal records. A records management program identifies records and sources of records and provides records management guidance, including agency-specific recordkeeping practices that establish what records need to be created to conduct agency business, among other things. Under the Federal Records Act, NARA has general responsibilities for oversight of agencies' federal records management. These responsibilities include issuing guidance for records management; working with agencies to implement effective controls over the creation, maintenance, and use of records in the conduct of agency business; providing oversight of agencies' records management programs; approving the disposition (destruction or preservation) of records; and providing storage facilities for agency records on a fee-for-service basis. NARA has issued regulations requiring that records be effectively managed throughout their life cycle, including records creation and receipt, maintenance and use, and disposition. One key records management process is scheduling, the means by which NARA and agencies identify federal records and determine timeframes for disposition. Creating records schedules involves identifying and inventorying records, appraising their value, determining whether they are temporary or permanent, and determining how long they should be kept before they are destroyed or turned over to NARA for archiving. Scheduling records requires agencies to invest time and resources to analyze the information that an agency receives, produces, and uses to fulfill its mission. Such an analysis allows an agency to set up processes and structures to associate records with schedules and other information to help it find and use records during their useful lives and dispose of those no longer needed. Scheduling involves broad categories of records rather than individual documents or file folders. Since 2009, NARA has required federal agencies to complete an annual self-assessment of their records management practices, to determine whether the agencies are compliant with statutory and regulatory records management requirements. The 2012 self-assessment survey called for agencies to evaluate themselves in four areas: (1) records management activities, (2) oversight and compliance, (3) records disposition, and (4) electronic records. NARA scores the self-assessments, and the accompanying agency documentation, and uses the scores to categorize each agency as low, moderate, or high risk in terms of compliance with federal regulations. Beginning in 2006, MCC established a records and information management program and subsequently established guidelines for handling compact management records and other compact-related information. However, MCC has not created a policy for--or conducted-- periodic reviews of the extent to which it has received the compact management records that it requires MCAs to provide to MCC for storage. In 2012, MCC's score on the NARA survey placed the agency in the moderate risk category--an average rating--for compliance with federal requirements. MCC established its records and information management program in 2006. The program's stated objectives, according to the 2011 version of its Records and Information Management Policy, are to create, maintain, and preserve adequate and proper documentation of its policies, transactions, and decisions; ensure the security and integrity of MCC's federal records, including the safeguarding of records against unauthorized access or disposition; and prevent the removal of records and control the removal of other materials from the agency. MCC's Records and Information Management Policy defines "federal record" consistently with the Federal Records Act's definition of "record." According to the policy, MCC catalogues its federal records into four major series, based on the records' functions. Administrative: Records commonly found at any federal agency, such as accounting and finance files, and budget, personnel, and procurement files. Governance: Records related to the Millennium Challenge Act of 2003, authorities, laws, and legislation, such as Board of Directors meeting minutes and resolutions, legal opinions, and ethics program records. Communications: Exchanges with external entities, such as MCC's annual report, congressional notifications, press releases, and official speeches, among other things. Millennium Challenge Account Assistance: MCC mission development, implementation, oversight, results, and closeout information pertaining to threshold programs and compacts. This category also includes compact management records, which are generated at least in part by the MCAs. MCC provides guidance regarding the maintenance of compact management records and the retention and storage of compact-related information. In 2007, MCC issued Policy and Procedures for Compact- Related Federal Recordkeeping, which was updated in 2012. The policy outlines specific policies and procedures regarding compact management records--which MCC refers to as a subset of federal records--and other compact-related information. The policy also includes a list specifying the types of documents that MCC classifies as compact management records. The policy and procedures apply regardless of whether the records and other compact-related information are created by MCC staff, partner governments, MCA entities, contractors, or other parties. Maintenance of compact management records. According to MCC's Policy and Procedures for Compact-Related Federal Recordkeeping, all information defined as a compact management record must be maintained at MCC headquarters during compact development and implementation and after compact closure. For example, under the policy, the following monitoring and evaluation documents are classified as compact management records, to be maintained at headquarters: indicator tracking tables, monitoring and evaluation plans and revisions, reviews and final impact evaluations, and data quality reviews. Retention and storage of compact-related information. MCC's Policy and Procedures for Compact-Related Federal Recordkeeping further states that the partner governments must retain, for at least 5 years after compact closure, types of information that are not defined as records but are important to the implementation and closure of compacts. The policy specifies, as examples of such information, (1) documents to support audits by MCC's Office of the Inspector General and GAO and (2) program evaluation documents to support ongoing analysis of MCC assistance. In another policy document, Program Closure Guidelines, MCC also requires MCAs to provide to MCC certain compact-related information for storage at MCC headquarters. For example, MCAs are required to provide the following information related to compact monitoring and evaluation: all MCC-funded survey data sets and supporting materials, such as questionnaires, enumerator field guides, data entry manuals, data dictionaries, and final reports; other analyses; evaluations; and data quality reviews and special studies that were funded through the compact's monitoring and evaluation budget. Table 1 describes compact management records and other compact- related information. Type of information Compact management records Description A subset of the Millennium Challenge Account Assistance series of federal records that must be maintained by MCC headquarters during implementation and after compact closure. To be retained by partner governments for at least 5 years after compact closure. Documents that may be needed to support future audits or analysis of MCC assistance. To be provided by MCAs for storage by MCC headquarters. Documents or copies of documents that must be provided to MCC during implementation or at compact closure, such as survey data sets and supporting materials. MCC's Policy and Procedures for Compact-Related Federal Recordkeeping assigns the responsibility for ensuring that the country's compact management records are transmitted and received at MCC headquarters to the MCC Resident Country Director serving in each partner country. The policy states that MCC has the responsibility to ensure that MCAs are taking reasonable steps to meet records management requirements. The policy also states that MCC is responsible for ensuring that the partners understand (1) what is covered by both compact management records and other compact-related information and (2) that MCC or a U.S. government audit, legal, or oversight entity may need to have access to such information for at least 5 years after the compact end date. MCC policy does not call for, and MCC has not performed, reviews of the extent to which it has received the compact management records that it requires MCAs to provide to MCC for storage. According to Standards for Internal Control in the Federal Government, a federal agency should have in place control activities--that is, policies, procedures, techniques, and mechanisms, including reviews of performance--to help ensure that management's directives are carried out. MCC's Policy and Procedures for Compact-Related Federal Recordkeeping assigns to the MCC Resident Country Director in each partner country the responsibility for ensuring the transmittal and receipt of the country's compact management records at MCC headquarters. However, MCC policy does not require periodic reviews of the records received from the MCAs to ensure that all required records have been transferred. In addition, MCC's Records Management Officer stated that MCC has not reviewed the compact management records it has received, for the following reasons: (1) the first compacts ended only recently, and (2) the records management program has limited resources. However, of the 11 compacts that have closed or been terminated, 5 ended in 2011 and 2 ended in 2010. Without periodically reviewing the compact management records it receives from the MCAs, MCC cannot be sure that it is meeting the Federal Records Act's requirement that it preserve all records documenting its functions, activities, decisions, and other important transactions. In 2012, MCC received a revised score of 77 out of 100 on NARA's self- assessment survey, which placed MCC in the moderate risk category in terms of compliance with federal requirements (see table 2). A NARA official characterized this score as an "average rating" for federal agencies. In the previous 3 years, MCC received the following scores: 92 (2009), 83 (2010), and 76 (2011) (see app. II for more information.) MCC's Records Management Officer also stated that meeting NARA requirements, especially for electronic records, is difficult for small federal agencies with limited resources and that MCC, in conjunction with other small agencies, has appealed to NARA for assistance. For the five closed compacts that we reviewed--MCC's compacts with Armenia, Benin, El Salvador, Ghana, and Mali--the MCAs provided varying levels of detail about their plans for retaining compact-related information to address MCC requirements. In addition, the five partner governments showed varying capacity to provide the documents that we asked MCC to retrieve. For the five compacts that we reviewed, the MCAs provided varying levels of detail about their plans for retaining compact-related information. MCC's Program Closure Guidelines instruct accountable entities to develop program closure plans describing their strategy for retaining and storing compact-related information. The guidelines state that each accountable entity should provide the following three items for MCC approval prior to the compact end date: a list of the types of documents the partner government will retain, a document retention schedule, and a brief description of the form and manner in which the documents will be stored. MCC's compact closure guidelines do not provide a sample document retention schedule specifying standard types of compact-related information that most compacts would need to retain or provide. All five program closure plans that we reviewed contained some discussion of filing and storing documents, but each MCA addressed the guidelines' three requirements differently. Such variation in approaches to scheduling and storing compact documentation will make it more difficult for MCC to verify that standard compact information is being retained in all partner countries after the compacts have closed. Types of documents to be retained. The program closure plans for the Armenia, Ghana, and Mali compacts specified that the respective partner governments would retain all compact-related information. The program closure plan for the Benin compact did not list the types of documents that the government would retain but stated that the MCA would provide further information in the document retention schedule. The program closure plan for the El Salvador compact stated that the government, through a contractor, would retain original files related to personnel, projects, procurement, finance, monitoring and evaluation, and studies. Document retention schedule. The MCAs' document retention schedules also varied. Armenia and Benin did not provide document retention schedules. El Salvador provided a comprehensive listing, by category, of all documents to be retained; however, it provided this list for the purposes of our review in April 2013, after the compact end date. Ghana's schedule, submitted after the compact end date but within the 3- month compact closure period, specified document types to be retained. Mali provided an undated printout of its electronic file system. According to MCC officials, the disparity among the MCAs' document retention schedules stemmed from insufficiently specific guidance provided by MCC. Form and manner of document storage. The MCAs' program closure plans specified varying forms and manners of storage for compact-related information after compact closure. According to the plans: Armenia will store the documents at three different government agencies: the state archives, the Ministry of Transport and Communications, and the Foreign Financing Projects Management Center (a foreign donor coordination unit); Benin will store the documents at its national archives; El Salvador has made a contractor responsible for the safekeeping of compact-related files and documents; Ghana's MCA will continue as a foreign donor coordination unit after compact closure and will retain all MCC documents; and Mali will store compact-related information at the Office of the Secretary General of the President (the "Office of the Segal"), which was the office of the principal government representative under the compact. Our test of MCC's ability to retrieve compact-related information from the five countries produced varying results that depended on the stability of the governments. Four of the governments provided all or most of the documents we requested. In contrast, Mali's government, which is in transition, provided none of the requested documents. Figure 1 displays the test results. Owing to its policy of relying on partner governments to retain and store compact-related information, MCC lost access to this information for 2 of the 11 closed compacts when, because of political turmoil, it terminated its compacts with Mali and Madagascar. Mali's government has been in transition since March 2012, when the administration at that time was overthrown. According to MCC, the transitional government in Mali will establish an office to handle post-compact issues but has not provided a point of contact. As a result, MCC officials reported that although they believe the information related to the Mali and Madagascar compacts exists and has been maintained in an organized fashion, they are currently unable to access the requested documents. MCC has previously noted that political turmoil in Madagascar, whose government was overthrown in 2009, impeded MCC's ability to access documents. MCC officials stated that they considered the response rate to our test to be good, particularly since the people retrieving the documents were not necessarily the same people who created or stored them. Previously, MCC has stated that its ability to retrieve documents from partner countries is reliant on its ability to access key individuals. MCC officials further stated that the difference in document return rates among the four countries that provided all or most of the requested documents may have been due to our test methodology. According to these officials, some of the documents we requested were not "critical path" documents, and our descriptions of the documents may not have been specific enough to allow the partner countries to identify them. However, all of the documents we requested were used in audits by the USAID's Office of the Inspector General. They thus serve as examples of the types of documents that might be needed to support future audits--one of the purposes for which MCC requires the partner governments to retain compact-related information for at least 5 years. Records and information management is important in all government agencies, in part because it helps ensure that the agencies remain transparent and accountable to the public and allows for congressional and executive branch oversight. MCC established a records management program that, according to NARA, is comparable to many others in the federal government. Yet, as an international aid agency providing bilateral assistance to partner governments, MCC's situation regarding records and information management is atypical: Much of the information related to its core business is generated by the partner governments' accountable entities, the MCAs. In accordance with NARA guidelines, MCC has established policies and guidelines stipulating that the MCAs must provide it with the compact management information it classifies as U.S. federal records. However, because its policies do not call for, and it does not conduct, systematic reviews of the records it receives, MCC cannot be sure that it is meeting the Federal Records Act's requirement that it preserve all records documenting its functions, activities, decisions, and other important transactions. MCC also has established policies that require partner governments to retain other compact-related information for at least 5 years after the compact closes, to support audits and its own program evaluations. However, for the five closed compacts that we reviewed, the variations in the partner governments' plans for retaining compact-related information could make it difficult for MCC to verify that the appropriate information is being retained. While MCC provides the partner governments a list specifying what types of documents it classifies as compact management records needed for storage at MCC headquarters, it does not provide such a list for other compact-related information expected to be retained in-country by the partner governments. A standardized schedule of compact-related information to be retained by each partner government would improve MCC's ability to find and use this information and increase MCC's efficiency in comparing similar information across compacts. Last, while four of the five partner governments were able to provide the information we requested in our test of MCC's system, the inability of one country--Mali, whose government is in transition--to produce any of the requested documents calls into question MCC's policy of relying on partner governments to retain and store most compact-related information. While the situation in Mali is unusual, the recent political turmoil in Madagascar, another former MCC partner, shows that such situations are not unique. Given that the countries that MCC targets for aid are, by definition, in transition, MCC could benefit from taking precautionary steps--such as weighing the costs and benefits of storing more compact-related information at MCC headquarters--to protect and ensure access to compact-related information. We recommend that MCC's Chief Executive Officer take the following three actions to strengthen MCC's records and information management program: 1. Develop a policy requiring--and conduct--periodic reviews of each set of compact management records that MCC receives from partner governments, to ensure that the records are complete. 2. Revise program closure guidelines to include a sample document retention schedule, specifying standard types of compact-related information that most compacts would need to retain. 3. Review MCC's policy of delegating the storage of compact-related information to partner governments, weighing the costs and benefits of storing more of this information at MCC headquarters. In written comments about a draft of this report, MCC stated that it agrees with our recommendations and is taking steps to implement them. With respect to our first recommendation--to develop a policy requiring, and to conduct, periodic reviews of each set of compact management records received from partner governments--MCC stated that, although it has been conducting selected reviews of compliance with compact records management requirements, making the practice more systematic would be useful. To that end, its Department of Compact Operations will ensure that reviews of MCC and MCA compliance with compact management records polices are incorporated in both implementation and close-out procedures. With respect to our second recommendation--to revise program closure guidelines to include a sample document retention schedule-- MCC stated that it will consider how best to structure a standardized list of core documents that also preserves a country's flexibility to tailor its document retention schedule in light of local laws and the specific types of compact projects. With respect to our third recommendation--to weigh the costs and benefits of storing more compact-related information at MCC headquarters--MCC stated that it will review, and revise as necessary, its Policy and Procedures for Compact-Related Federal Record Keeping to ensure that it specifies all documents that should be defined as federal records. We have reprinted MCC's comments in appendix III. We have also incorporated technical comments from MCC in our report where appropriate. NARA also provided technical comments on a draft of this report, which we have incorporated as appropriate. In addition, NARA stated that having reviewed our description of MCC's classification of federal records and "non-records" as they pertain to the MCAs, it will contact MCC to ensure that proper classification is occurring. We are sending copies of this report to interested congressional committees and the Millennium Challenge Corporation. In addition, this 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 David Gootnick at (202) 512-3149 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 are listed in appendix IV. Our objectives were to (1) examine the Millennium Challenge Corporation's (MCC) records and information management program and practices and (2) assess partner-country governments' implementation of MCC guidelines for retention and storage of compact-related information. To examine MCC's records and information management program and practices, we reviewed MCC's policies and guidelines regarding records and information management, focusing in particular on three documents: Records and Information Management Policy (June 2011), Policy and Procedures for Compact-Related Federal Recordkeeping (September 2012), and Program Closure Guidelines (May 2011). We also reviewed the results of MCC's annual self-assessment surveys from 2009 through 2012, a tool that the National Archives and Records Administration (NARA) developed to assess agencies' self-compliance with the Federal Records Act and other laws and regulations related to records management, and we reviewed relevant laws, regulations, and circulars produced by the Office of Management and Budget. In addition, we interviewed officials at MCC and NARA. To assess partner governments' implementation of MCC's guidelines for retention and storage of compact-related information, we selected five closed compacts--Armenia's, Benin's, El Salvador's, Ghana's, and Mali's--to use as case studies. We chose these compacts because they closed after May 2011 and therefore were subject to MCC's Program Closure Guidelines, which were finalized that month. We reviewed the documentation that the partner governments or their accountable entities (usually referred to as Millennium Challenge Accounts, or MCAs) had provided to MCC in response to those guidelines. Regarding MCC's requirement that the partner governments make provisions for the form and manner of document storage, we reviewed the compacts' program closure plans to ensure that provisions for document storage were included, but we did not verify that specific storage requirements--such as security and acclimatization--were met. We also conducted a test of MCC's ability to retrieve compact-related information from partner governments after compact closure. For this test, we asked MCC to request that the partner governments for the case- study compacts provide copies of documents that the U.S. Agency for International Development's (USAID) Office of the Inspector General (OIG) had collected during the course of performance and financial audits of the five countries. We selected the audits from a list that the OIG provided, and we drew from those audits a random sample of documents that we requested from the partner governments. We used OIG files because it has conducted audits in all 5 countries, whereas GAO has not. Selection of performance and financial audits. The OIG provided a list of 10 performance and 4 financial audits that it considered relevant to our case studies. We removed one performance audit from the list, because the OIG had conducted the audit prior to any MCC compact's entry into force and the audit therefore would not yield valid documents. We then selected three performance audits and one financial audit to review for each of the case-study compacts (except Armenia's, for which the OIG did not conduct a financial audit). Several of the performance audits on the OIG's list covered more than one of the case-study compacts. Because Armenia and Benin's compacts were both covered in two performance audits and Mali's compacts was covered by three performance audits, we included all of these audits in our sample. Because Ghana's and El Salvador's compacts were each covered by more than three performance audits, we randomly selected among the relevant audits. Because the OIG conducted only one financial audit per compact (except Armenia's), we selected all of the listed financial audits. See table 3 for a list of the audits that we selected from which we randomly drew supporting documents for our case studies. Random sample of audit documents. Each audit contained multiple files, from which we randomly drew a sample of 93 documents: 20 documents for Benin's, Ghana's, and Mali's compacts; 18 documents for El Salvador's compact; and 15 documents for Armenia's compact. The number of documents that we sampled per compact varied for two reasons: (1) because the OIG has not conducted a financial audit for Armenia's compact, we were unable to select any financial-audit- related documents for our sample, and (2) the performance audit files for El Salvador's compact contained only 18 appropriate documents. Table 4 shows the number of documents we sampled per compact, by type of audit (financial or performance). Requests for sampled documents. We provided a list of the randomly sampled documents for each case-study compact to MCC. We identified each document using, as appropriate, its title, date, and other identifying information (e.g., contract number, payment order number, beneficiary name, letter recipient). For Benin's, Ghana's, El Salvador's, and Mali's compacts, we listed the document titles and other information in the document's original language (English, French, or Spanish). For Armenia, we translated the title and other information into English when necessary. We asked MCC to share these lists with the five partner governments and to request that they send us copies of the documents, either electronic or paper, within 20 business days, in keeping with the Freedom of Information Act's (FOIA) requirement. In response to an MCC comment that the documents we requested would not, as "non-records," be subject to the FOIA requirement, we have reported the numbers of documents that the partner governments returned within 30 calendar days--the requirement stated in MCC's Program Closure Guidelines. However, the numbers of documents returned within 20 business days were identical to the numbers returned within 30 calendar days. Verification of requested documents. To verify that the partner governments provided the documents we requested, we conducted two separate comparisons of the documents we received with corresponding electronic copies, which USAID's OIG had allowed us to retain in our files. We conducted this performance audit from September 2012 to June 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 the evidence obtained provides a reasonable basis for our findings and conclusions based on our audit objectives. Since 2009, the National Archives and Records Administration (NARA) has administered a survey to assess federal agencies' compliance with federal records-keeping laws and regulations. The Millennium Challenge Corporation (MCC) has received the following scores: 92 (2009), 83 (2010), 76 (2011), and 77 (2012). See tables 5 through 8 below for more information. In addition to the contact named above, Emil Friberg, Jr. (Assistant Director) and Miriam Carroll Fenton made key contributions to this report. Additional technical assistance was provided by Reid Lowe, Christopher Mulkins, Justin Fisher, Martin de Alteriis, Nancy Hunn, Mark Bird, Etana Finkler, and Ernie Jackson.

MCC has approved 26 bilateral compact agreements, providing a total of about $9.3 billion to help eligible developing countries reduce poverty and stimulate economic growth. MCC is subject to the Federal Records Act, which requires that agencies preserve all records documenting its functions and other important transactions. GAO was asked to review MCC's management of records and information. This report (1) examines MCC's records and information management program and practices and (2) assesses partner governments' implementation of MCC's information retention guidelines. GAO analyzed MCC documents, interviewed MCC officials, and tested MCC's ability to retrieve compact-related information from five closed compacts. GAO selected these compacts because they closed after May 2011, when MCC's Program Closure Guidelines went into effect. In 2006, the Millennium Challenge Corporation (MCC) established a records and information management program to maintain and preserve its federal records. The program includes policies related to compact management records--a subset of MCC's federal records. These policies also address the handling of other compact-related information generated by MCC partner governments' accountable entities, which typically manage compact implementation until the 5-year compacts close. MCC's policies require that the entities transfer their compact management records to MCC for storage before compact closure. MCC also requires that partner governments retain compact-related information not classified as records, such as survey data and data quality reviews, for at least 5 years after their compacts close, to facilitate audits and analysis of MCC assistance. However, MCC does not require, and has not conducted, periodic reviews to determine whether it has received all compact-management records from the accountable entities consistent with federal internal control standards. As a result, MCC cannot be sure that it is meeting the federal requirement that it preserve all records documenting its functions, activities, and other transactions. In reviews of five closed compacts--Armenia's, Benin's, El Salvador's, Ghana's, and Mali's--GAO found variation in the accountable entities' implementation of MCC document retention requirements and the partner governments' ability to retrieve requested compact-related information after the compacts closed. As required by MCC's compact closure guidelines, all five program closure plans that we reviewed contained some discussion of retaining and storing documents, but each accountable entity addressed the guidelines' requirements differently. MCC's guidelines do not provide a list specifying standard types of compact-related information that most compacts should retain. Such variation in approaches to retaining and storing compact-related information will make it more difficult for MCC to verify that standard compact information is retained in all partner countries after the compacts close. In addition, in a test of MCC's ability to retrieve documents from the partner governments after compact closure, GAO found that four of the five governments provided all or most requested documents within 30 days, but Mali's, which is involved in political turmoil, provided no documents. Political turmoil in Madagascar, another compact-recipient country, has also impeded MCC's ability to obtain compact information that may be needed to conduct future audits, evaluate project impact, or inform future compact designs. To strengthen MCC's records and information management program, MCC's Chief Executive Officer should (1) develop a policy requiring--and conduct--periodic reviews of MCC's compact-management records to ensure they are complete, (2) revise guidelines to include a sample document retention schedule specifying standard types of compact-related information compacts should retain, and (3) review MCC's policy of delegating storage of most compact-related information to partner governments. MCC agreed with all three recommendations and stated that they have already taken steps to implement them.

In 2001, there were about 4.8 million gastroenterological procedures and about 306,000 urological procedures performed on Medicare beneficiaries nationwide that were conducted at least 90 percent of the time in health care facilities and less than 10 percent of the time in physicians' offices. About 3.3 percent (or about 156,000) of these gastroenterological procedures and 3.8 percent (or about 12,000) of these urological procedures were conducted in physicians' offices. About 35 percent of all office-based gastroenterological endoscopic procedures were conducted in the New York City metropolitan area. Medicare regulates ASCs and other health care facilities that conduct endoscopic procedures by requiring that they satisfy conditions related to safety, facility design, staff expertise, and other factors in order to treat Medicare beneficiaries. If an ASC is accredited by a national accrediting body or licensed by a state agency that provides reasonable assurances that the conditions are met, CMS may deem it to comply with most requirements. These conditions include, for example, the following: Compliance with state licensure requirements. An effective procedure for immediate transfer to hospitals of patients needing emergency medical care beyond the capabilities of the ASC. Safe performance of surgical procedures by qualified physicians granted clinical privileges by the ASC under Medicare-approved policies and procedures. Ongoing comprehensive self-assessment of the quality of care with active participation of the medical staff. Use of a safe and sanitary environment, properly constructed, equipped, and maintained to protect the health and safety of patients. Provision of adequate management and staffing of nursing services to ensure that nursing needs of all patients are met. Maintenance of complete, comprehensive, and accurate medical records to ensure adequate patient care. Safe and effective provision of drugs and biologicals under the direction of a responsible individual. According to the American College of Surgeons, nine states have guidelines or regulations pertaining to the safety of office-based surgical procedures (including endoscopy) that address issues of Medicare certification, state licensure, accreditation, and inspection of physicians' offices: In California, state licensure, Medicare certification, or accreditation is required for all outpatient settings where anesthesia is used. In Connecticut, state regulations require any office or facility operated by a licensed health care practitioner or practitioner group to be accredited by a nationally recognized body if sedation or anesthesia is used. In Florida, the state is required to inspect a physician's office where certain levels of surgery (including endoscopy) are performed, unless a nationally recognized accrediting agency or another accrediting organization approved by the Board of Medicine accredits the office. In Illinois, state regulations allow the delivery of anesthesia services by a certified registered nurse anesthetist in the office only if the physician has training and experience in these services. In Mississippi, physicians conducting office procedures must register with the state, maintain logs of surgical procedures conducted, follow federal standards for sterilization of surgical instruments, and report any surgical complications to a state board. In New Jersey, state regulations have been developed to establish training programs for physicians who utilize anesthesia in their office practices. In Rhode Island, state regulations require licensure for offices in which surgery, other than minor procedures, is performed. Accreditation by a nationally recognized agency or organization is also required. In South Carolina, guidelines address the safe delivery of anesthesia, the presence of emergency equipment, procedures to transfer emergency cases to hospitals, and physician training. In Texas, regulations govern physicians in outpatient settings providing general or regional anesthesia. In addition, organizations such as the American Society for Gastrointestinal Endoscopy and the Society of American Gastrointestinal Endoscopic Surgeons publish safety guidelines that are similar to the Medicare guidelines for ASCs. These guidelines are designed to ensure that endoscopies are conducted safely regardless of whether they are conducted in health care facilities or physicians' offices. However, the Medicare program does not regulate physicians' offices and does not make judgments about the safety of procedures conducted there. In 1992, the Health Care Financing Administration (HCFA) began the implementation of a resource-based physician fee schedule for the Medicare program. The physician fee schedule is applicable to procedures conducted in a variety of health care settings, including hospitals, ASCs, and physicians' offices. Under this fee schedule, physician payments are based on relative amounts of resources needed to provide procedures regardless of the health care setting. The physician fee schedule includes three components. The physician work component (implemented in 1992) provides payment for the physician's time, effort, skill, and judgment necessary to provide a service. The malpractice insurance component reimburses physicians for the expense of their professional liability insurance. The practice expense component compensates physicians for direct expenses, such as clinical staff salaries, medical supplies, and medical equipment and indirect expenses, such as administrative staff salaries and other office expenses incurred in providing services. Unlike the other two components, physician practice expenses can differ depending on where the procedure is performed. In the office setting, the physician is responsible for providing clinical staff, supplies, and equipment needed to perform a service. In the facility setting, such as a hospital or ASC, these are the responsibility of the facility. Medicare's practice expense payments to physicians can differ depending upon the medical setting to reflect these differences. For medical facilities, practice expense payments to physicians are generally lower, because Medicare pays for nursing support, equipment, and supplies needed with a separate facility fee. However, when these procedures are performed in an office, Medicare pays physicians for these expenses in the practice expense portion of the physician fee schedule. The differences in practice expense payments for the same procedure are referred to as the site-of-service differential. In 1999, HCFA began a now completed 3-year phase-in of the site-of-service payment differential, as a part of the resource-based practice expense system. In previous work, we found that HCFA used acceptable methodology and relied on the best data available to develop the practice expense component of its Medicare payment system of which this payment differential is a result. Medicare's higher payment for office- based procedures reflects the higher expenses to the physicians of providing those procedures, but this payment may not cover all of their expenses. We found no evidence to suggest that the level of safety of gastroenterological or urological endoscopy conducted on Medicare beneficiaries differs by medical setting. In our search of the relevant scientific literature maintained by the National Library of Medicine and in discussions with Medicare carrier medical directors, physicians, and physician specialty societies, we found no evidence of a higher occurrence of medical complications from office-based gastroenterological and urological endoscopic procedures relative to other medical settings. Furthermore, according to a major trade association representing medical malpractice insurance companies, the pricing policies of insurance companies indicate that those companies do not believe that office-based endoscopy poses additional safety risks. Our search of relevant scientific literature maintained by the National Library of Medicine and discussions with physicians revealed little evidence of complications associated with office-based endoscopy for gastrointestinal and urological procedures. The scientific literature on the safety of office endoscopy is sparse; we were able to locate only one published study. This study of upper gastrointestinal procedures conducted in France showed very few complications over the course of nearly 18,000 endoscopic procedures. In this study, there was one death (the patient had previously diagnosed heart disease), one case of breathing difficulty (considered avoidable by the authors), and five other minor incidents. During the 10,000 exams performed over the last 12 years of this 17-year study, no clinically significant incidents occurred. We discussed the safety of office-based endoscopy with physicians, including representatives of three organizations critical of the CMS practice expense site-of-service differential policy. We also discussed in- office safety issues with four Medicare carrier medical directors, including those in New York where there is a relatively high proportion of office procedures conducted. All of these officials, including the critics of the policy, emphasized that the procedures as currently conducted are safe and that complications are extremely rare. According to the Physician Insurers Association of America, a trade association that represents the malpractice insurance industry, office- based endoscopy is not riskier than endoscopy conducted in health care facilities. For example, two large New York malpractice insurance companies do not levy a surcharge on physicians who conduct office- based surgery, including the endoscopic procedures included in our study. One of these New York companies, which has the largest market share nationwide (and 57 percent of the malpractice insurance market in New York) does not consider office-based surgery an issue when setting rates for its clients. The other New York company requires physicians who conduct surgery in their offices to follow its company standards for equipment and safety backup procedures, and it reserves the right to conduct unannounced inspections of their offices. It does not, however, impose a surcharge on physicians for office-based procedures. It does require a surcharge for endoscopic procedures, but the amount does not differ by medical setting. Although the site-of-service Medicare payment differential for the 12 common gastroenterological endoscopic procedures in our study has increased since the practice expense component of the resource-based fee schedule began to be implemented in 1999, the percentage of these procedures performed in the office has not increased. The average Medicare practice expense payments for the 12 gastroenterological endoscopic procedures are presented in figure 1. The figure shows that the payment differential has increased both because the average practice expense payments for procedures performed in health care facilities have decreased substantially (from $133 in 1998 to $59 in 2002) and because the payment for office-based procedures has nearly doubled (from $143 in 1998 to $277 in 2002). The payment differential for urological procedures has similarly increased since the average practice expense payments for such procedures performed in health care facilities have decreased by more than half (from $218 in 1998 to $83 in 2002) and because the average payments for office-based procedures have more than doubled (from $218 in 1998 to $448 in 2002.) The nationwide percentage of common office-based gastroenterological and urological endoscopic procedures conducted on Medicare beneficiaries has not increased (see fig. 2). For example, the percentage of the gastroenterological procedures in our study conducted in the office nationwide declined from about 4.8 percent in 1996 to 3.9 percent in 1998, the last year of the old practice expense payment system, and to 3.3 percent in 2001 as the phase-in of the new practice expense system approached completion. Similarly, the percentage of the urological procedures in our study declined from about 5.7 percent in 1996 to 4.7 percent in 1998 to 3.8 percent in 2001. From 1996 through 2001 in the New York City metropolitan area, where about 35 percent of the nationwide Medicare-covered office procedures were conducted, the proportion of office-based endoscopic procedures for gastroenterology has remained fairly constant at slightly less than 30 percent. During the same period, the proportion of office-based urological procedures in our study has declined from 11 percent to 8 percent. However, regardless of geographic area, these findings must be interpreted with caution. It is too early to determine the full effects of the new practice expense system's payment differential, as it was not fully implemented until 2002. We were directed by BIPA to assess whether the access to care by Medicare beneficiaries would be adversely affected if gastroenterological procedures conducted in physicians' offices were no longer reimbursed by Medicare. If this occurred, patients in most of the nation would not likely experience access problems for the procedures in our study, given that relatively few procedures are performed in the office setting. However, some New York City metropolitan area Medicare patients might have initial difficulty obtaining care. In 2001, 28 percent, or about 54,000, of the gastroenterological procedures for Medicare patients in the New York City area were conducted in physicians' offices, accounting for about 35 percent of these office procedures nationwide. According to CMS data, the New York City area has the largest proportion and total number of office- based gastroenterological procedures of any geographic area in the nation. In our review of CMS data on the geographic dispersion of office procedures, we have been unable to locate other areas of the country with such a major reliance on the availability of office-based gastroenterological endoscopy. If Medicare coverage for the common endoscopic office procedures included in our study were withdrawn, medical facilities might not have the capacity to absorb the displaced patients in the short term, according to a New York State Department of Health official and Medicare carrier directors. However, in 1998, New York State eased requirements for approval of new ASCs, and, as a result, medical facility capacity has recently begun to increase in the state and in the New York City area. New York requires an approved certificate of need (CON) in order to approve a new ASC. To obtain a CON, the need for the services of a proposed ASC must be demonstrated for specific geographic areas. According to a New York State Department of Health official, the rules for CON approval were relaxed significantly in March 1998, and nearly all applications are currently being approved. Since March 1998, there has been an increase of almost 200 percent in the number of ASCs in New York, including major increases in the New York City area. CON approvals can be obtained in the New York City area because most area hospitals are operating at capacity. In the future, if ASCs are equipped to offer the gastroenterological procedures included in our study, it is possible that they could accommodate displaced patients, if they are located in areas accessible to these patients. In contrast, only about 8 percent of the urological procedures in the New York City area were conducted in offices, so the elimination of Medicare reimbursement would likely have a minimal effect on the delivery of these procedures. Some critics of the Medicare site-of-service payment differential for endoscopic procedures have questioned the practice of conducting them as office procedures because of concerns about patient safety. They have suggested that the differential provides an incentive to the physician to provide endoscopic procedures in a setting--the physician's office--that is less safe than another setting, such as a hospital or an ASC. But in our review of common gastroenterological and urological endoscopic procedures, we found no evidence that safety problems are greater for these procedures conducted in physicians' offices. Furthermore, we found that the proportion of common office-based gastroenterological and urological endoscopic procedures included in our study has not increased as the site-of-service differential has been phased in. However, because the payment differential has been in effect only since 1999 and was not fully implemented until 2002, it is too early to tell whether it will affect the percentage of procedures conducted in the office in the future. If the common office-based endoscopic procedures included in our study were no longer reimbursed by Medicare, most areas of the country would not develop patient access problems. However, the initial effects in the New York City metropolitan area--where there is a predominance of office- based procedures--could be problematic, although the increase in ASCs in the New York City area could mitigate patient access problems in the future. CMS provided written comments on a draft of this report, and concurred with the general findings in the study (see app. III). The agency provided technical comments, which we have addressed where appropriate. We are sending this report to the CMS Administrator and interested congressional committees. We will also make copies available to other interested parties on request. In addition, the report available at no charge on the GAO Web site at http://www.gao.gov. If you or your staffs have any questions, please contact me at (202) 512- 7101. Major contributors to this report are listed in appendix IV. This appendix provides detailed information on the gastroenterological and urological procedures that we selected for our study. It also describes the methods that we used to address the study's main objectives. We selected the 12 gastroenterological and 8 urological endoscopic procedures that are ordinarily performed in health care facilities and that we defined as being conducted at least 90 percent of the time in health care facilities and less than 10 percent of the time in offices. These gastroenterological and urological procedures are common types of endoscopy. These procedures have a practice expense site-of-service differential. The procedures included in our study accounted for about 30 percent of the total number of gastroenterological and urological endoscopic procedures conducted for Medicare beneficiaries in 2001; about 3.5 percent of the procedures in our study were conducted in offices. Many of these procedures require the use of sedation and entail some risks for patients. Our results are not generalizable to other endoscopic procedures. Tables 1 and 2 provide detailed information on the 20 procedures included in our study. To assess the safety of office-based endoscopy, we reviewed the scientific literature and interviewed physicians; four Medicare carrier medical directors in the New York City area; North Dakota; and Wyoming; a representative of Physicians Insurance Association of America; an official from a trade association that represents the medical malpractice insurance industry; and representatives of two large New York malpractice insurance companies. We also interviewed interest group representatives, including members of the American College of Gastroenterology, American Society for Gastrointestinal Endoscopy, American College of Surgeons, American Gastroenterology Association, and American Urological Association. We also reviewed regulations and guidelines on physician office-based endoscopy in the nine states that have such regulations and guidelines. These states are California, Connecticut, Florida, Illinois, Mississippi, New Jersey, Rhode Island, South Carolina, and Texas. To assess whether the practice expense site-of-service payment differential acts as an incentive for physicians to conduct gastroenterological and urological endoscopic procedures in their offices, we analyzed data from the Centers for Medicare & Medicaid Services (CMS) using the Part B Extract and Summary System on the medical settings (office, inpatient hospital, outpatient hospital, and ambulatory surgical center) for relevant procedures for 1996 through 2001. For the gastroenterological and urological procedures in our analysis, we developed averages of practice expense reimbursements for health care facilities and offices for each year from 1998 through 2002. To determine whether access to care by Medicare beneficiaries would be affected if endoscopic procedures in physicians' offices were no longer reimbursed by Medicare, we analyzed CMS data (using the Part B Extract and Summary System) on office-based endoscopy for the nation as a whole and for the New York City area, which has the highest proportion of office-based procedures in the nation. We interviewed Medicare carrier medical directors in several locales with a range of population size and density, including the New York City area, North Dakota, and Wyoming. Tables 3 and 4 summarize the percentages of gastroenterological and urological endoscopic procedures in our sample performed in physicians' offices, hospitals (both inpatient and outpatient), and ASCs for 1996 through 2001. In the data provided to us by CMS, there was another medical setting category ("other") that captured a broad variety of medical settings, including nursing facilities, rural health clinics, and military treatment facilities. The proportion of procedures conducted in these settings was very low, about 1 percent or less. In 1999, some of the claims data were coded incorrectly, and the Health Care Financing Administration inaccurately assigned larger proportions to the "other" category (from 5 to 9 percent). Because of this confusion, we have eliminated the "other" category from the analysis for 1999 and the other years to ensure consistency in comparisons. Our reanalysis affects the results for 1999 because it is unclear where the claims categorized as "other" should have been categorized. However, because of the relatively few cases affected, we do not believe that this error affects our analyses or conclusions. Lawrence S. Solomon, Martin T. Gahart, Vanessa Taylor, Wayne Turowski, Roseanne Price, and Mike Thomas made major contributions to this report.

Every year millions of Americans covered by Medicare undergo endoscopic medical procedures in a variety of health care settings ranging from physicians' offices to hospitals. These invasive procedures call for the use of a lighted, flexible instrument and are used for screening and treating disease. Although some of these procedures can be performed while the patient is fully awake, most require some form of sedation and are usually provided in health care facilities such as hospitals or ambulatory surgical centers (ASC). Some physician specialty societies have expressed concern that Medicare's reimbursement policies may offer a financial incentive to physicians to perform endoscopic procedures in their offices and that these procedures may be less safe because physicians' offices are less closely regulated and therefore there is less oversight of the quality of care. For the 20 procedures reviewed, there was no evidence to suggest that there in any difference in the level of safety of gastroenterological and urological endoscopic procedures performed on Medicare beneficiaries in either physicians' offices or health care facilities, such as hospitals and ASC's. There was also no evidence found to suggest that the resource-based site-of-service payment differential has caused physicians to conduct a greater proportion of gastroenterological or urological endoscopic procedures in their offices for Medicare beneficiaries. If Medicare coverage for the office procedures in the study were terminated, few access problems would occur in most of the country because physicians perform the vast majority of the procedures that were studied in health care facilities.

VHA offers eligible veterans a standard medical benefits package, including primary care. To receive these health care benefits, veterans must first complete VA's enrollment application--the 1010 EZ--and submit it online, in person, by mail, or by fax to a VA medical center or VA's Health Eligibility Center. Health Eligibility Center officials query several VA and Department of Defense databases to verify veterans' eligibility for benefits and share this information with the applicable medical centers. If the Health Eligibility Center cannot make a determination as to veterans' eligibility, officials notify veterans' local medical centers to take further action, such as requesting additional documentation of military service records. The Health Eligibility Center sends a letter to each veteran once it has made an eligibility determination with the decision and a description of benefits. Veterans requesting on their enrollment applications that VA contact them to schedule appointments, if eligible, are to be placed on VHA's New Enrollee Appointment Request (NEAR) list. (See fig.1 for an illustration of how newly enrolling veterans request on their enrollment applications that VA contact them to schedule appointments.) The NEAR list is intended to help VA medical centers track newly enrolled veterans needing appointments. It includes information regarding the medical center at which the veteran wants to be seen, contact information for the veteran, and whether the veteran is waiting to be contacted to schedule an appointment. If a veteran submits an application in person, medical center staff may schedule an appointment for the veteran at that time. Once the appointment is scheduled, the request is considered "filled" and the veteran's name is removed from the NEAR list. According to VHA policy, as outlined in its July 2014 interim scheduling guidance, VA medical center staff should contact newly enrolled veterans to schedule appointments within 7 days from the date they were placed on the NEAR list. When contacted by the medical center, which may be by phone or letter, each veteran is scheduled for a 60-minute appointment based on the veteran's preferred date--the date the veteran wants to be seen. Schedulers negotiate appointment dates with veterans using the preferred date and appointment availability. In July 2015, VA's Health Resource Center began implementing a new program called "Welcome to VA." Under this program, Health Resource Center staff located at central call centers are responsible for contacting each newly enrolled veteran within 5 days of the veteran's enrollment date. Call center staff are to contact each veteran who submits an enrollment application and is determined eligible for health care, regardless of whether the veteran requests to be contacted on the application, to determine whether the veteran wants to schedule an appointment. To make an appointment, Health Resource Center staff are to provide the veteran with the phone number for his or her preferred VA medical center and connect the veteran with a local scheduler. Health Resource Center officials explained that although this program was running concurrently with the NEAR list process at the time of our review, the program will eventually replace the NEAR list process. When fully implemented, which is expected in spring 2016 according to Health Resource Center officials, medical centers would use a list generated by the Health Resource Center to contact veterans who request appointments. If VA medical center schedulers attempt to schedule appointments for new patients, including newly enrolled veterans, and no appointments are available within 90 days from when veterans would like to be seen, VHA policy requires that veterans be added to the electronic wait list. As appointments become available, schedulers contact veterans on the electronic wait list to schedule their appointments, at which time they are removed from the wait list. According to VHA policy, providers should document clinically appropriate return-to-clinic dates in the veterans' medical records at the end of each appointment. Follow-up appointments requested by providers within 90 days of seeing a veteran should be scheduled before the veteran leaves the clinic. Follow-up appointments requested beyond 90 days are to be entered into the VA medical center's Recall Reminder System. The recall system automatically notifies veterans, of the need to schedule a follow- up appointment. When a veteran receives an appointment reminder, he or she is asked to contact the clinic to make an appointment. Primary care appointments for established patients are generally scheduled for 30 minutes. Schedulers determine the date of each follow-up appointment based on the return-to-clinic date the provider documented in the veteran's medical record. VHA's July 2014 interim scheduling guidance established an appointment wait-time goal of 30 days for new patients based on the date each appointment was created (referred to as the create date) and 30 days for established patients based on each veteran's preferred date. In October 2014, in response to the Choice Act, VHA eliminated the wait-time measure based on create date. It instituted a new wait-time goal of providing appointments for new and established patients not more than 30 days from the date that an appointment is deemed clinically appropriate by a VA health care provider, or if no such determination has been made, the veteran's preferred date. VHA, VISNs, and VA medical centers each have responsibilities for developing scheduling and wait-time policies for primary care and for monitoring wait-time measures to ensure medical centers are providing timely access. The VHA Director of Access and Clinical Administration and VHA's Chief Business Office have responsibilities for oversight of medical centers' implementation of VHA's enrollment and scheduling policies, including measuring and monitoring ongoing performance. Each VISN is responsible for overseeing the facilities within its designated region, including the oversight of enrollment, scheduling, and wait lists for eligible veterans. Finally, medical center directors are responsible for ensuring local policies are in place for the timely enrollment of veterans and for the effective operation of their primary care clinics, including affiliated community-based outpatient clinics and ambulatory care centers. In addition, the medical center director is responsible for ensuring that any staff who have access to the appointment scheduling system have completed the required VHA scheduler training. Our review of medical records for a sample of veterans at six VA medical centers found several problems in medical centers processing veterans' requests that VA contact them to schedule appointments, and thus not all newly enrolled veterans were able to access primary care. For the 60 veterans in our review who had requested care, but had not been seen by primary care providers, we found that 29 did not receive appointments due to the following problems in the appointment scheduling process: Veterans did not appear on NEAR list. We found that although 17 of the 60 veterans in our review requested that VA contact them to schedule appointments, medical center officials said that schedulers did not contact the veterans because they had not appeared on the NEAR list. Medical center officials were not aware that this problem was occurring, and could not definitively tell us why these veterans never appeared on the NEAR list. For 6 of these veterans, VA medical center officials told us that when they reviewed the medical records at our request, they found that these veterans' requests were likely filled, in error, by a compensation and pension exam. In these cases, officials had no record that these veterans had appeared on the NEAR list that schedulers used to contact veterans. Officials at one medical center explained that they encourage providers to discuss how to make an appointment with veterans at the end of the compensation and pension exam. For the remaining 11 veterans, after reviewing their medical records, officials were unable to determine why the veterans never appeared on the NEAR list. VA medical center staff did not follow VHA scheduling policy. We found that VA medical centers did not follow VHA policies for contacting newly enrolled veterans for 12 of the 60 veterans in our review. VHA policy states that medical centers should document three attempts to contact each newly enrolled veteran by phone, and if unsuccessful, send the veteran a letter. However, for 5 of the 12 veterans, our review of their medical records revealed no attempts to contact them, and medical center officials could not tell us whether the veterans had been contacted to schedule appointments. Medical centers attempted to contact the other 7 veterans at least once, but did not follow the process to contact them as outlined in VHA policy. For 24 of the 60 veterans who did not have a primary care appointment, VA medical center officials stated that scheduling staff were either unable to contact them to schedule an appointment or upon contact, the veterans declined care. Officials stated that they were unable to contact 6 veterans either due to incorrect or incomplete contact information in veterans' enrollment applications, or to veterans not responding to medical centers' attempts to contact them. In addition, VA medical center officials stated that 18 veterans declined care when contacted by a scheduler. These officials said that in some cases veterans were seeking a VA identification card, for example, and did not want to be seen by a provider at the time. The remaining 7 of the 60 veterans had appointments scheduled but had not been seen by primary care providers at the time of our review. Four of those veterans had initial appointments they needed to reschedule, which had not yet been rescheduled at the time of our review. The remaining three veterans scheduled their appointments after VHA provided us with a list of veterans who had requested care. Based on our review of medical records for a sample of veterans across the six VA medical centers in our review, we found the average number of days between newly enrolled veterans' initial requests that VA contact them to schedule appointments and the dates the veterans were seen by primary care providers at each medical center ranged from 22 days to 71 days. (See table 1.) Slightly more than half of the 120 veterans in our sample were able to see a provider in less than 30 days; however, veterans' experiences varied widely, even within the same medical center, and 12 of the 120 veterans in our review waited more than 90 days to see a provider. We found that two factors generally impacted veterans' experiences regarding the number of days it took to be seen by primary care providers. First, appointments were not always available when veterans wanted to be seen, which contributed to delays in receiving care. For example, one veteran was contacted within 7 days of being placed on the NEAR list, but no appointment was available until 73 days after the veteran's preferred appointment date. This veteran was placed on the electronic wait list per VHA policy, and a total of 94 days elapsed before the veteran was seen by a provider. In another example, a veteran wanted to be seen as soon as possible, but no appointment was available for 63 days. Officials at each of the six medical centers in our review told us that they have difficulty keeping up with the demand for primary care appointments for new patients because of shortages in the number of providers, or lack of space due to rapid growth in the demand for these services. Officials at two of the medical centers told us that because of these capacity limitations, they were placing veterans who requested primary care services on an electronic wait list at the time our review. Second, we found weaknesses in VA medical center scheduling practices may have impacted the amount of time it took for veterans to see primary care providers and contributed to unnecessary delays. Staff at the medical centers in our review did not always contact veterans to schedule an appointment according to VHA policy, which states that attempts to contact newly enrolled veterans to schedule appointments must be made within 7 days of their being added to the NEAR list. Among the 120 veterans included in our review, 37 veterans (31 percent) were not contacted according to VHA policy within 7 days to schedule an appointment, and compliance varied across medical centers. (See table 2.) We found some medical center processes for contacting newly enrolled veterans to schedule appointments were inconsistent with VHA policy and may have contributed to delays in scheduling newly enrolled veterans: VA officials at one medical center told us that they send letters to newly enrolled veterans who apply online, which inform the veterans that it is their responsibility to come into the medical center to complete enrollment and schedule appointments. According to VISN officials with oversight of this VA medical center, this practice is not consistent with VHA scheduling policies, and veterans should not be asked to come to medical centers to schedule their appointments. In one case, a veteran enrolled online and requested VA contact him to schedule an appointment, but according to medical center officials, the veteran was not called to schedule an appointment, although a letter was later sent. As a result, officials said he did not receive an appointment until he contacted the medical center to again ask for one 47 days later. At another medical center, we found that the medical center's process for contacting newly enrolled veterans involves initial calls to explain their VHA health care benefits. After the initial call, each veteran's name is sent to a scheduler to contact the veteran to schedule an appointment. Although officials indicated that initial outreach to the veterans in our review often occurred within 7 days of their addition to the NEAR list, these veterans were not always contacted again to schedule appointments within 7 days, in accordance with VHA's scheduling policy. Finally, officials at a third medical center told us they added every new enrollee to the electronic wait list even when there were appointments available within 90 days of the veteran's request. The VA medical center then used the electronic wait list rather than the NEAR list to identify veterans who needed to be contacted to schedule an appointment. For example, a veteran requested VA contact him to schedule an appointment, and was added to the electronic wait list. Rather than contacting the veteran within 7 days of being added to the NEAR list, in accordance with VHA policy, officials contacted the veteran 19 days later to schedule an appointment. Officials told us that they changed their process during our review and are now using the NEAR list to identify newly enrolled veterans who need appointments. Our review found that of 60 veterans who received follow-up primary care, most received care within 30 days of the return-to-clinic date determined by each veteran's provider, in accordance with VHA's policy. Our review found that for 51 veterans return-to-clinic dates were applicable and documented in their medical records and 38 of these veterans were seen by providers within 30 days of their return-to-clinic dates. However, the percentage of veterans seen within 30 days of their return-to-clinic dates varied across medical centers in our review. (See table 3.) We found several reasons why the 13 veterans (out of the 51 for whom return-to-clinic dates were applicable) were not seen for follow-up appointments within 30 days of their return-to-clinic dates: Improperly managed recall reminder process. For 6 of the 13 veterans, VA medical center staff did not properly manage their "recall reminder" process, which notifies veterans that they need to schedule a follow-up appointment, as outlined in VHA policy. Our review of the veterans' medical records and discussions with medical center officials found that medical center staff did not place 5 veterans on the recall list to receive appointment scheduling reminders as outlined in VHA policy, and thus the veterans were not contacted to schedule their appointments in a timely manner. For the other veteran, one recall notice was sent, and schedulers did not attempt to make contact again, according to medical center officials. Lack of available appointments or veterans preferred later appointment dates. Four of the 13 veterans were seen more than 30 days beyond the return-to-clinic dates due to the lack of available appointments or based on their preferred dates. Cancellations and no-shows. For the remaining 3 of the 13 veterans, medical records indicated that appointments were initially scheduled within 30 days of the return-to-clinic dates; however, 2 veterans did not show up for their appointments and the other veteran's appointment was canceled by the primary care clinic. These veterans were ultimately seen beyond the 30-day time frame. A key component of VHA's oversight of veterans' access to primary care, particularly for newly enrolled veterans, relies on monitoring appointment wait times. However, VHA monitors only a portion of the overall time it takes newly enrolled veterans to access primary care. VHA officials said they regularly review data related to access, including data on wait times for primary care. VHA has developed reports to track these data for each VISN and VA medical center. VHA officials indicated that they look for trends in average wait times across medical centers, and also track the percentage of veterans seen within 30 days of their preferred dates or return-to-clinic dates. Officials from all six VISNs and medical centers in our review said they use these reports, and other locally developed reports, to monitor wait times for each of their sites of care to identify any trends. VISN and VA medical center officials said if they find wait times are increasing, they work to identify solutions, which the medical center is then tasked with implementing. For example, officials from two VISNs and medical centers told us that in response to increasing wait times for primary care, actions have been taken to improve patient access, including opening new sites of care and hiring additional providers. We found, however, that VHA monitors only a portion of the overall time it takes newly enrolled veterans to access primary care, which is inconsistent with federal internal control standards. According to the internal controls for information and communications, information should be recorded and communicated to management and others within the entity who need it to carry out their responsibilities. However, VHA monitors access using veterans' preferred appointment dates, which are not determined until schedulers make contact with veterans, as the basis for measuring how long it takes veterans to be seen, rather than the dates newly enrolled veterans requested on their enrollment applications that VA contact them to schedule appointments. (See fig. 2.) Therefore, VHA does not account for the time it takes to process enrollment applications, or the time it takes VA medical centers to contact veterans to schedule their appointments. Consequently, data used for monitoring and oversight do not capture veterans' overall experiences, including the time newly enrolled veterans wait prior to being contacted by a scheduler, which makes it difficult for officials to effectively identify and remedy scheduling problems that arise prior to making contact with veterans. Our review of medical records for 120 newly enrolled veterans found that, on average, the total amount of time it took to be seen by primary care providers was much longer when measured from the dates veterans initially requested VA contact them to schedule appointments than it was when using appointment wait times calculated using veterans' preferred dates as the starting point. (See table 4.) The amount of time elapsed between when veterans initially requested VA contact them to schedule appointments and when they are seen by providers may be due to veterans' decisions such as not wanting to schedule appointments immediately, or cancelling and rescheduling initial appointments. However, we found the amount of time between initial requests and when they received care also varied due to factors unaffected by veterans' decisions, including VA medical centers not contacting veterans in a timely manner, medical centers being unaware of veterans' requests, and difficulties in processing veterans' requests that they be contacted to schedule appointments. For example: One veteran applied for VHA health care benefits in December 2014, which included a request to be contacted for an initial appointment. The VA medical center contacted the veteran to schedule a primary care appointment 43 days later. When making the appointment, the medical center recorded the veteran's preferred date as March 1, 2015, and the veteran saw a provider on March 3, 2015. Although the medical center's data showed the veteran waited 2 days to see a provider, the total amount of time that elapsed from the veteran's request until the veteran was seen was actually 76 days. For another veteran, the medical record indicated that a request to schedule an appointment was made in October 2014. According to VA medical center officials, the veteran had a compensation and pension exam, and as a result, this veteran was not on the list of those who needed to be contacted to schedule a primary care appointment. Officials told us that the veteran contacted the medical center in January 2015 to schedule an appointment, with a preferred date in January 2015. The veteran had his appointment in February 2015. While the medical center's data show the veteran waited 13 days to be seen, the total amount of time that elapsed from the veteran's initial request to schedule an appointment until the veteran was seen was 113 days. According to VHA officials responsible for monitoring wait times, there are no VHA policies requiring that they measure and monitor the total amount of time that newly enrolled veterans experience while waiting to be seen by a primary care provider. Instead, VHA's policy is to use data that measure the timeliness of appointments based on veterans' preferred dates. Although there is no policy requiring that they measure the total time veterans wait to be seen, officials from one VISN told us that they measure this period of time, as it may provide valuable insights into newly enrolled veterans' experiences in trying to obtain care from VHA. During our discussions with these VISN officials, they expressed concern that monitoring veterans' wait times using the preferred date is too limited, because it does not capture the full wait times veterans experience. Since February 2015, officials from this VISN have instructed each of the medical centers they oversee to audit a sample of 30 primary care, specialty care, and mental health appointments for new patients, including newly enrolled veterans, for a total of 90 appointments each month. As part of this audit, medical center officials record the dates veterans initially requested VA contact them to schedule appointments, the dates appointments were created, and the dates veterans were seen by providers. VISN officials use the information to prepare a monthly summary report which tracks a variety of information, including the percentage of appointments for which the veterans' overall wait was more than 30 days. According to data from the October 2015 audit, 24 percent of veterans waited more than 30 days from their initial request until they were seen by a provider. Officials indicated that by analyzing trends on these and other data, they will be able to identify whether factors such as enrollment issues or problems contacting newly enrolled veterans are impacting overall wait times. Officials indicated that it is time-consuming to perform these audits, and it would be helpful if VHA had a centralized system which would enable them to electronically compile the data. During our review we also found that under the Health Resource Center's Welcome to VA program, officials are developing a centralized electronic system to track various dates related to newly enrolled veterans, including the date each veteran applied for VHA health care. Once applications for benefits are approved, staff in the Health Resource Center call centers contact each newly enrolled veteran, and ask if that veteran wants to begin receiving health care at VHA. For veterans that indicated on their applications that they wanted to be contacted to schedule an appointment, their requests are confirmed through these calls, and the dates of the requests on the applications are recorded in the Health Resource Center system, as well as the dates the veterans were contacted. For veterans who did not indicate they wanted to be contacted on their applications, but tell Health Resource Center staff during the calls that they want care, the dates of contact are documented as their initial requests for care. Officials indicated that it is important to begin tracking from the onset of veterans' requests, because that is when they told VA they needed care. Officials indicated that since July 2015, they have been piloting this Welcome to VA data collection and tracking effort with one VISN, and hope to expand this effort across the VHA system during 2016. They further indicated that they have been coordinating with the VHA office responsible for monitoring access, and hoped their data could be integrated into VHA's routine monitoring of veterans' wait times. Ongoing problems continue to affect the reliability of wait-time data, including for primary care, used by VHA, VISN, and VA medical center officials for monitoring and oversight. Our previous work in 2012, as well as that of VA and the VA OIG in 2014, has shown that VHA wait-time data are unreliable and prone to errors and interpretation. Among other things, we found in December 2012 that medical centers were not implementing VHA's scheduling policies in a consistent manner, which led to unreliable wait-time data. Although VHA has taken steps since then to improve the reliability of its wait time data, including ensuring that scheduling staff complete required training, we found VHA schedulers were continuing to make errors in recording veterans' preferred dates; and thus, data reliability problems continue to hinder effective oversight. During our review of appointment scheduling for 120 newly enrolled veterans, we found that schedulers in three of the six VA medical centers included in our review had made errors in recording veterans' preferred dates when making appointments. Specifically, we found 15 appointments for which schedulers had incorrectly revised the preferred dates. In these cases, we recalculated the appointment wait time based on what should have been the correct preferred dates, according to VHA policy, and found the wait-time data contained in the scheduling system were understated. (See table 5.) We found that schedulers incorrectly revised patients' preferred dates to later dates, inconsistent with VHA policy, under two scheduling scenarios: 1. Medical center primary care clinics cancelled appointments, and when those appointments were re-scheduled, schedulers did not always maintain the original preferred dates in the system, but updated them to reflect new preferred dates recorded when the appointments were rescheduled. This is not consistent with VHA policy, which indicates that if a clinic cancels an appointment, the original preferred date should be maintained in the system. 2. Preferred dates initially recorded when placing veterans on the electronic wait list were incorrectly revised to later dates when appointments became available and were scheduled. This included revising preferred dates to the same dates of the scheduled appointments. This is also inconsistent with VHA policy, which indicates that the veterans' preferred dates recorded at the time of entry on the electronic wait list should not be changed. We confirmed our understanding of this policy with officials from one of the VISNs, and discussed these cases with VA medical center officials, who indicated that they would need to provide additional training to schedulers to ensure compliance with VHA's scheduling policies. We also found in our review of medical records, that of 120 veterans who saw providers, 65 veterans, or 54 percent, had appointments with a zero- day wait time recorded in the scheduling system. VHA officials indicated that appointments with wait times of zero days are a potential indicator of scheduling errors. Based on our review of medical records for these veterans, 13 of the appointments with zero-day wait times were those that were incorrect due to schedulers revising preferred dates. In addition, officials from five of the six VA medical centers in our review told us they continue to find through their scheduling audits that schedulers are incorrectly recording preferred dates. Officials from each of the six medical centers explained that they periodically audit scheduled appointments to help ensure schedulers are complying with scheduling policies. Officials from these medical centers indicated a key focus of the audits is to assess whether schedulers are correctly recording the preferred date when making appointments, and that wait times are being calculated correctly. For example, officials from one medical center said they audited nearly 1,200 appointments between January and June 2015, and identified 205 appointments for which schedulers incorrectly recorded the veteran's preferred date. Officials indicated that based on these results, scheduling supervisors provided training with those schedulers who made the errors. Since July 2014, VHA has issued a revised interim scheduling directive and numerous individual memos to clarify and update the scheduling policy, but has not yet published a comprehensive policy that incorporates all of these changes. Officials from four of the six VISNs in our review indicated that the way VHA has communicated revised scheduling policies and updates to medical centers has been ineffective and may be contributing to continued scheduling errors. They indicated that high turnover among schedulers and the lack of an updated standardized scheduling policy make it more difficult to train schedulers and to direct these staff to current policy, which increases the likelihood of errors. Federal internal control standards call for management to clearly document, through management directives or administrative policies, significant events or activities--which in this instance would include ensuring that scheduling policies are readily available and easily understood--and that management should use and communicate, both internally and externally, quality information to achieve its objectives. VHA officials acknowledged that they are aware of frustration among medical center staff, and that they have been working over the past 18 months to develop an updated and comprehensive scheduling policy. Officials indicated that their current target is to issue a revised policy some time in 2016. To help VA medical centers and VISNs identify scheduling problems, in January 2015, VHA implemented its scheduling trigger tool, which is designed to provide medical center and VISN officials with an early warning that scheduling problems may be occurring. According to VHA officials, the tool uses statistical analysis software to review appointment data from all medical centers in order to detect potential erroneous scheduling practices, including those that deviate from VHA policies. For example, it assesses whether medical center schedulers are accurately documenting patients' preferred dates and whether they are using the electronic wait list correctly for new patients. The tool assesses each medical center's scheduling performance and automatically alerts medical center and VISN leadership if a medical center is performing in the bottom 20 percent. According to VHA officials, use of the tool has prompted many requests for assistance, and they have provided additional scheduler training. VHA has implemented two system-wide efforts designed to offer veterans more timely access to primary care: the Veterans Choice Program, created through the Choice Act; and an initiative to increase primary-care hours. In addition to the VHA-wide initiatives aimed at improving access, officials from the VA medical centers in our review also reported implementing several local efforts to improve veterans' timely access to primary care appointments. (See table 6.) Specifically, officials from all six medical centers reported reconfiguring or expanding clinic space. For example, officials at two medical centers stated that they are reconfiguring their primary care clinic's space to accommodate additional providers and other staff without having to lease additional space. Officials from another medical center told us they were expanding clinic space by opening several additional community-based outpatient clinics by entering into emergency lease agreements in addition to beginning the construction of new clinic space. Further, officials from five medical centers in our review reported hiring additional providers or creating additional positions. For example, officials at one medical center stated that since 2013 they have hired 20 new full- time providers and 18.5 full-time equivalent nurses. Additionally, they have also created a new position--a "gap" provider who is a doctor, nurse practitioner, or nurse--that allows flexibility to cover short-term leave such as sick or annual leave or longer-term leave such as the gap between one provider leaving and a new provider coming on board. In practice, the medical center shifts gap providers from one location to another as needed, enabling the medical center to minimize backlogs that may arise due to staffing shortages and unanticipated provider absences. Currently, this medical center has seven gap providers in primary care. Similarly, two other medical centers reported using flexible providers who work across several clinic locations to improve access to primary care for veterans. Finally, officials from three of the medical centers included in our review reported developing technological solutions to improve access to timely primary care appointments. These solutions included increasing the use of telehealth and secure messaging to improve the convenience and availability of primary care appointments. For example, officials from one of the medical centers in our review said providers are using secure messaging to communicate with patients and reduce the need for in- person encounters, which they said helps free up appointments for other patients. Providing our nation's veterans with timely access to primary care is a critical responsibility of VHA. As primary care services are often the entry point to the VA health care system for newly enrolled veterans, the ability to access primary care and establish a relationship with a VHA provider can be instrumental in the ongoing management of a veteran's overall health care needs. Although VHA has processes for identifying those veterans who have requested VA contact them to schedule appointments, our review of a sample of newly enrolled veterans revealed that VA medical centers did not always provide that care until several months after veterans initially indicated interest in obtaining it, if at all. In several cases, newly enrolled veterans were never contacted to schedule appointments, due to medical center staff failing to comply with VHA policies for scheduling such appointments or medical center staff being unaware of veterans' requests. In the absence of consistent adherence by medical center staff to VHA scheduling processes and policies, veterans may continue to experience delays in accessing care. To help oversee veterans' access to primary care, officials at VHA's central office, medical centers, and VISNs rely on measuring, monitoring, and evaluating the amount of time it takes veterans to be seen by a provider. The data currently being used to evaluate newly enrolled veterans' access to primary care, however, are limited because they do not account for the entire amount of time between veterans' initial requests to be contacted for appointments and being seen by primary care providers. This is because the method VHA uses to measure the appointment wait times for newly enrolled veterans does not begin at the point at which veterans initially request that VA contact them to schedule appointments when applying for VHA health care, but rather begins when VA medical center staff contact veterans and record the veterans' preferred dates. Consequently, data used for monitoring and oversight do not capture the time newly enrolled veterans wait prior to being contacted by a scheduler, making it difficult for officials to effectively identify and remedy scheduling problems that arise prior to making contact with veterans. Recognizing limitations in monitoring and oversight of access data based on veterans' preferred dates, some system-wide and local efforts are being developed and implemented to broaden data collection and oversight of newly enrolled veterans' access to primary care; such efforts could have applicability across the entire VHA system. Ongoing scheduling problems continue to affect the reliability of wait-time data, including for primary care. Our previous work has shown that VHA wait-time data are unreliable due, in part, to medical centers not implementing VHA's scheduling policies consistently. VHA central office officials have responded to scheduling problems throughout the VHA system by issuing several individual memorandums to clarify scheduling policies. However, VHA's piecemeal approach in implementing these policies may not be fully effective in providing schedulers with the comprehensive guidance they need to consistently adhere to scheduling policies or providing the reliable data officials need for monitoring access to primary care. Our review of medical records for a sample of veterans found that scheduling errors continue, diminishing the reliability of data officials use for monitoring the timeliness of appointments by understating the amount of time veterans actually wait to see providers. Officials at several of the VA medical centers also continue to uncover scheduling errors through audits, and VISN officials attribute the errors, in part, to the lack of an updated comprehensive scheduling policy. While VHA central office officials are working on finalizing an updated scheduling policy, they currently have no definitive issuance date. Until a comprehensive scheduling policy is finalized, disseminated, and consistently followed by schedulers, the likelihood for scheduling errors will persist. We recommend that the Secretary of Veterans Affairs direct the Under Secretary for Health to take the following three actions: (1) Review VHA's processes for identifying and documenting newly enrolled veterans requesting appointments, revise as appropriate to ensure that all veterans requesting appointments are contacted in a timely manner to schedule them, and institute an oversight mechanism to ensure VA medical centers are appropriately implementing the processes. (2) Monitor the full amount of time newly enrolled veterans wait to be seen by primary care providers, starting with the date veterans request they be contacted to schedule appointments. This could be accomplished, for example, by building on the data collection efforts currently being implemented under the "Welcome to VA" program. (3) Finalize and disseminate a comprehensive national scheduling directive, which consolidates memoranda and guidance disseminated since July 2014 on changes to scheduling processes and procedures, and provide VA medical center staff appropriate training and support to fully and correctly implement the directive. We provided VA with a draft of this report for its review and comment. VA provided written comments, which are reprinted in appendix II. In its written comments, VA concurred with all three of the report's recommendations, and identified actions it is taking to implement them. As arranged with your office, unless you publicly disclose the contents earlier, we plan no further distribution of this report until 24 days after the date of this report. At that time, we will send copies of this report to the appropriate congressional committees, the Secretary of Veterans Affairs, and other interested parties. 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 about this report, please contact me at (202) 512-7114 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 key contributions to this report are listed in appendix III. Our prior work has found weaknesses in the Department of Veterans Affairs' (VA) Veterans Health Administration's (VHA) ability to effectively oversee timely access to health care for veterans. Specifically, we found that VHA did not have adequate data and oversight mechanisms in place to ensure veterans receive timely primary and specialty care, including mental health care. Since 2012, we have issued several reports and made recommendations to help ensure VHA has effective policies and reliable data to carry out its oversight. See table 7 for our previous recommendations and the status of their implementation. In addition to the contact named above, Janina Austin, Assistant Director; Jennie F. Apter; Emily Binek; David Lichtenfeld; Vikki L. Porter; Brienne Tierney; Ann Tynan; and Emily Wilson made key contributions to this report.

Primary care services are often the entry point for veterans needing care, and VHA has faced a growing demand for outpatient primary care services over the past decade. On average, 380,000 veterans were newly enrolled in VHA's health care system each year in the last decade. GAO was asked to examine VHA's efforts to provide timely access to primary care services. This report examines, among other things, (1) newly enrolled veterans' access to primary care and (2) VHA's related oversight. GAO interviewed officials from six VA medical centers selected to provide variation in factors such as geographic location, clinical services offered, and average primary care wait times; reviewed a randomly selected, non-generalizable sample of medical records for 180 newly enrolled veterans; and interviewed VHA and medical center officials on oversight of access to primary care. GAO evaluated VHA's oversight against relevant federal standards for internal control. GAO found that not all newly enrolled veterans were able to access primary care from the Department of Veterans Affairs' (VA) Veterans Health Administration (VHA), and others experienced wide variation in the amount of time they waited for care. Sixty of the 180 newly enrolled veterans in GAO's review had not been seen by providers at the time of the review; nearly half were unable to access primary care because VA medical center staff did not schedule appointments for these veterans in accordance with VHA policy. The 120 newly enrolled veterans in GAO's review who were seen by providers waited from 22 days to 71 days from their requests that VA contact them to schedule appointments to when they were seen, according to GAO's analysis. These time frames were impacted by limited appointment availability and weaknesses in medical center scheduling practices, which contributed to unnecessary delays. VHA's oversight of veterans' access to primary care is hindered, in part, by data weaknesses and the lack of a comprehensive scheduling policy. This is inconsistent with federal internal control standards, which call for agencies to have reliable data and effective policies to achieve their objectives. For newly enrolled veterans, VHA calculates primary care appointment wait times starting from the veterans' preferred dates (the dates veterans want to be seen), rather than the dates veterans initially requested VA contact them to schedule appointments. Therefore, these data do not capture the time these veterans wait prior to being contacted by schedulers, making it difficult for officials to identify and remedy scheduling problems that arise prior to making contact with veterans. Further, ongoing scheduling errors, such as incorrectly revising preferred dates when rescheduling appointments, understated the amount of time veterans waited to see providers. Officials attributed these errors to confusion by schedulers, resulting from the lack of an updated standardized scheduling policy. These errors continue to affect the reliability of wait-time data used for oversight, which makes it more difficult to effectively oversee newly enrolled veterans' access to primary care. GAO recommends that VHA (1) ensure veterans requesting appointments are contacted in a timely manner to schedule one; (2) monitor the full amount of time newly enrolled veterans wait to receive primary care; and (3) issue an updated scheduling policy. VA concurred with all of GAO's recommendations and identified actions it is taking to implement them.

SSA administers two federal programs under the Social Security Act that provide benefits to people with disabilities who are unable to work: The DI program provides cash benefits to workers with disabilities and their dependents based on their prior earnings. The SSI program provides benefits to the elderly and individuals with disabilities if they meet the statutory test of disability and have income and assets that fall below levels set by program guidelines. The DI program was established in 1956 to provide monthly cash benefits to individuals who were unable to work because of severe long-term disability. SSA pays disability benefits to eligible individuals under Title II of the Social Security Act. An individual is considered eligible for disability benefits under the Social Security Act if he or she is unable to engage in any SGA because of a medically determinable impairment that (1) can be expected to result in death or (2) has lasted (or can be expected to last) for a continuous period of at least 12 months. To be eligible for benefits, individuals with disabilities must have a specified number of recent work credits under Social Security (specifically, working 5 out of the last 10 years or 20 quarters out of 40 quarters) at the onset of medical impairment. An individual may also be able to qualify based on the work record of a deceased spouse or of parent who is deceased, retired, or considered eligible for disability benefits, meaning one disability beneficiary can generate multiple monthly disability payments. Benefits are financed by payroll taxes paid into the Federal Disability Insurance Trust Fund by covered workers and their employers, based on each worker's earnings history. Individuals are engaged in SGA if they have earnings above $940 per month in calendar year 2008 or $980 per month in calendar year 2009. SSA conducts work-related continuing disability reviews (CDR) to determine if beneficiaries are working at or above the SGA level. Each beneficiary is allowed a 9-month trial work period, during which the beneficiary is permitted to earn more than the SGA level without affecting his or her eligibility for benefits. The trial work period is one of several provisions in the DI program intended to encourage beneficiaries to resume employment. Once the trial work period is completed, beneficiaries are generally ineligible for future DI benefits unless their earnings fall below the SGA level during the 36-month extended period of eligibility (EPE). Work issue CDRs are triggered by several types of events, although most are generated by SSA's Continuing Disability Review Enforcement Operation. This process involves periodic computer matches between SSA's administrative data and Internal Revenue Service (IRS) wage data. Work CDRs can also be triggered by other events. For example, SSA requires beneficiaries to undergo periodic medical examinations to assess whether they continue to be considered eligible for benefits. During such reviews, SSA's staff sometimes discovers evidence that a beneficiary may be working and usually forwards the case to an SSA field office or program service center for earnings/work development. Additional events that may trigger a work CDR include reports from state vocational rehabilitation agencies, reports from other federal agencies, and anonymous tips. Finally, DI beneficiaries may voluntarily report their earnings to SSA by visiting an SSA field office or calling the agency's toll- free number. SSA had increased work-related CDRs from about 106,500 in fiscal year 2003 to about 175,600 in fiscal year 2006. However, the number of work CDRs has decreased slightly since 2006, and SSA projects that it will conduct about 174,200 work CDRs in fiscal year 2010. Created in 1972, the SSI program is a nationwide federal cash benefit program administered by SSA that provides a minimum level of income to financially needy individuals who are aged, blind, or considered eligible for benefits because of physical or mental impairments. Payments under the SSI program are paid under Title XVI of the Social Security Act and are funded from the government's General Fund, which is financed through tax payments from the American public. Individuals are not eligible for SSI payments for any period during which they have income or resources that exceed the allowable amounts established under the Social Security Act. In addition, relevant information will be verified from independent or collateral sources to ensure that such payments are correct and are only provided to eligible individuals. SSI recipients are required to report events and changes of circumstances that may affect their eligibility and payment amounts, including changes in income, resources, and living arrangements. SSI generally reduces the monthly benefit $1 for every $2 of monthly earnings after the first $85. SSA has implemented measures to help identify SSI recipients with excess income, excess resources, or both, such as periodically conducting redeterminations to verify whether recipients are still eligible for and receiving the correct SSI payments. A redetermination is a review of a recipient's nonmedical eligibility factors, such as income, resources, and living arrangements. There are two types of redeterminations: scheduled and unscheduled. Scheduled redeterminations are conducted periodically depending on the likelihood of payment error. Unscheduled redeterminations are conducted based on a report of change in a recipient's circumstances or if SSA otherwise learns about a change that may affect eligibility or payment amount. SSA has deferred a significant number of SSI redeterminations since fiscal year 2003. Although SSA increased the number of SSI redeterminations in fiscal year 2009 above the 2008 level, the number of reviews remains significantly below the fiscal year 2003 level. Specifically, SSA conducted about 719,000 SSI redeterminations in fiscal year 2009, 30 percent fewer than it did in fiscal year 2003. However, if SSA completes the number of SSI redeterminations it is projecting for fiscal year 2010, it will be close to the fiscal year 2003 level. Our overall analysis found thousands of federal employees, commercial drivers, and owners of commercial vehicle companies who were receiving Social Security disability benefits during fiscal year 2008. It is impossible to determine from data mining alone the extent to which beneficiaries improperly or fraudulently received disability payments. To adequately assess an individual's work status, a detailed evaluation of all the facts and circumstances should be conducted. This evaluation would include contacting the beneficiary and the beneficiary's employer, obtaining corroborating evidence such as payroll data and other financial records, and evaluating the beneficiary's daily activities. Based on this evaluation, a determination can be made if the individual is entitled to continue to receive SSA disability payments or have such payments suspended. As such, our analysis provides an indicator of potentially improper or fraudulent activity related to federal employees, commercial drivers, and owners of commercial vehicle companies receiving SSA disability payments. Our case studies, discussed later, confirmed some examples in which individuals received SSA disability payments that they were not entitled to receive. Our analysis of federal civilian salary data and SSA disability data found that about 7,000 individuals at selected agencies had been wage-earning employees for the federal government while receiving SSA disability benefits during fiscal year 2008. The exact number of individuals who may be improperly or fraudulently receiving SSA disability payments cannot be determined without detailed case investigations. Our analysis of federal salary data from October 2006 through December 2008 found that about 1,500 federal employees' records indicate that they may be improperly receiving payments. The individuals were identified using the following criteria: (1) DI beneficiaries who received more than 12 months of federal salary payments above the maximum SSA earnings threshold for the DI program (e.g., $940 per month for nonblind DI beneficiaries during calendar year 2008) after the start date of their disabilities or (2) SSI recipients who received more than 2 months of federal salary above the maximum SSA earnings threshold for the SSI program after the start date of their disabilities. Based on their SSA benefit amounts, we estimate that these approximately 1,500 federal employees received about $1.7 million of payments monthly. Table 1 summarizes the types of SSA disability benefits for these 1,500 federal employees who are receiving disability benefits. Figure 1 shows that 379 of the approximately 1,500 federal employees were U.S. Postal Service workers and 241 were DOD civilian employees. The remainder was other federal civilian employees. According to SSA officials, SSA currently does not obtain payroll records from the federal government to identify SSA disability beneficiaries or recipients who are currently working. SSA officials stated that they have not conducted a review to determine the feasibility of conducting such a match. However, SSA acknowledged that these payroll records may be helpful in more quickly identifying individuals who are working so that work CDRs could be performed to evaluate whether those individuals should have their disability payments suspended. Our analysis of data from DOT on commercial drivers and from SSA on disability beneficiaries found that about 600,000 individuals had been issued CDLs and were receiving full Social Security disability benefits. The actual number of SSA disability beneficiaries with active CDLs cannot be determined for two reasons. First, states maintain the current status of CDLs, not DOT. Second, possession of a CDL does not necessarily indicate that the individual returned to work. Because federal regulations require interstate commercial drivers to be examined and certified by a licensed medical examiner to be able to physically drive a commercial vehicle once every 2 years, we selected a nonrepresentative selection of 12 states to determine how many SSA disability beneficiaries had CDLs issued after their disabilities were determined by SSA. Of the 600,000 CDL holders receiving Social Security disability benefits, about 144,000 of these individuals were from our 12 selected states. As figure 2 shows, about 62,000 of these 144,000 individuals, or about 43 percent, had CDLs that were issued after SSA determined that the individuals met the federal requirements for full disability benefits. As a result, we consider the issuance of CDLs to be an indication that these individuals may no longer may no longer have serious medical conditions and may have returned to work. have serious medical conditions and may have returned to work. Our analysis of DOT data on commercial carriers found about 7,900 individuals who registered as transportation businesses and also received SSA disability benefits. The extent to which these business registrants are obtaining disability benefits fraudulently, improperly, or both is not known because each case must be investigated separately for such a determination to be reached. These companies may have gone out of business and not reported their closure to DOT, which would explain their registration. In addition, DI beneficiaries may have a passive interest in the business, which would not affect their eligibility for benefits. However, we believe that the registration of a business is an indicator that the individual could be actively engaged in the management of the company and gainfully employed, potentially disqualifying him or her from receiving either DI or SSI benefits. It also suggests that the individual's assets may exceed the SSI maximum for eligibility. According to SSA officials, SSA currently does not obtain CDL or transportation businesses registrant records from DOT. SSA officials stated that these records do not have specific income records associated with them. Based on our overall analysis above, we nonrepresentatively selected 20 examples of federal employees, commercial drivers, and registrants of commercial vehicle companies who received disability payments fraudulently and/or improperly. As mentioned earlier, the 20 cases were primarily selected based on our analysis of SSA electronic and paper files for the higher overpayment amounts, the types of employment, and the locations of employment, and thus they cannot be projected to other federal employees, commercial drivers, or commercial vehicle owners who received SSA disability payments. In each case, SSA's internal controls did not prevent improper and fraudulent payments, and as a result, tens of thousands of dollars of overpayments were made to individuals for 18 of these 20 cases. In fact, in one case, we estimate that SSA improperly paid an individual over $100,000 in disability benefits. For 10 of the 20 cases, SSA continued to pay these individuals their SSA disability benefits through October 2009 primarily because the agency had not yet identified their ineligibility for benefits. For the other cases, SSA has terminated the disability benefits and has negotiated repayment agreements for 2 of those cases. Our investigations found that five individuals committed fraud in obtaining SSA disability benefits because they knowingly withheld employment information from SSA. Fraud is "a knowing misrepresentation of the truth or concealment of a material fact to induce another to act to his or her detriment." Although SSA instructions provided to beneficiaries require them to report their earnings to SSA in a timely manner to ensure that they remain eligible for benefits, several individuals knowingly did not notify SSA of their employment. Our investigations also found that 11 individuals potentially committed fraud because these individuals likely withheld required employment information from SSA. Most of these individuals claimed that they reported their employment information to SSA. However, according to SSA officials, for all 11 individuals, SSA did not have any tangible documentation in its files that these individuals actually reported their employment status to SSA. SSA officials stated that their workers are required to document all contacts in their files and that these purported contacts regarding employment notifications were likely never made. Finally, our investigations found four cases with no evidence of fraud but, rather, of administrative error. In these situations, the beneficiaries told our investigators that they reported their employment to SSA and SSA had evidence in its files that such contact did occur. Thus, we concluded that SSA made improper payments to these individuals because SSA was aware of the employment but continued to make disability payments to those individuals. During our investigations of the 20 cases, we also noted the following: SSA has an automated process, called Automated Earnings Reappraisal Operations (AERO), that screens changes in an individual's earnings record and uses that information to compute changes in the monthly disability benefit payment. However, SSA currently does not use AERO to identify individuals who return to work and alert SSA staff to review these individuals' records for possible suspension of disability payments. As a result, SSA increased the monthly disability benefits of several individuals based on the higher wages the individuals' current employers reported to the agency but did not properly suspend the payments to those individuals. Four individuals received additional disability benefits because they had dependent children living with them. One individual was hired by a federal agency during the required waiting period prior to becoming eligible for benefits. This individual also improperly received additional government medical assistance (i.e., Medicare) based on the SSA disability determination. Certain individuals who claim that they are unable to immediately repay the disability benefits they improperly received can be put on long-term repayment plans that span years or decades. Although SSA has the authority to charge interest and penalties, SSA did not do so on these agreements. As a result, several individuals from our cases were placed in long-term, interest-free repayment plans for improperly accepting disability overpayments. For 1 of our 20 cases, SSA placed an individual on a repayment plan to repay approximately $33,000 in overpayments through $20 monthly installments. Based on this agreement, it will take over 130 years to repay this debt, exceeding the life expectancy for this individual. For 18 of these 20 cases, the individuals also received $250 stimulus checks as part of the Recovery Act while they were improperly receiving SSA disability payments. According to SSA officials, most of these individuals were entitled to and would receive the $250 stimulus checks even if SSA had properly suspended the disability payments to them. Specifically, SSA officials stated that beneficiaries covered under the DI program would have been covered under EPE, which is a 36-month period in which SSA does not pay any benefit amounts (i.e., payments are suspended) if the beneficiary has earnings above the maximum SSA SGA threshold. According to SSA officials, all working beneficiaries covered by EPE received the $250 stimulus check. The Recovery Act states that these stimulus benefit payments should be provided to individuals who are entitled to DI benefit payments or are eligible for SSI cash benefits. SSA stated that it did not seek a formal legal determination as to whether individuals who had their paym suspended because of employment should receive these stimulus payments. In total, SSA paid about $10.5 million in stimulus payments to However, approximately 42,000 individuals who were covered by EPE. we believe that a question exists as to whether these payments were proper and believe that SSA should have at least sought a formal legal opinion before making the payments. Table 2 highlights 10 of the 20 individuals we investigated. Table 3 in appendix I describes the other 10 individuals that we investigated. For 3 of these 20 cases, we videotaped the individuals who had improperly received disability benefits working at their federal government jobs. (See http://www.gao.gov/products/GAO-10-444.) In all 20 cases, we found that SSA had improperly paid the Social Security disability benefits. While it is important to encourage individuals with disabilities to return to work, SSA must also ensure that it has an effective system in place to maintain its program integrity. SSA has a stewardship responsibility to identify those individuals who have returned to work and are no longer eligible for benefits. Because of limited resources, SSA must effectively allocate its resources to identify such individuals. Federal payroll records and the AERO process are tools that SSA could utilize to timely initiate reviews and minimize improper and fraudulent payments. To enhance SSA's ability to detect and prevent fraudulent and improper payments in its disability programs, we recommend that the Commissioner of Social Security take the following two actions to improve the agency's processes: Evaluate the feasibility (including consideration of any costs and operational and system modifications) of incorporating the AERO process to identify individuals who have returned to work. Evaluate the feasibility of periodically matching SSA disability beneficiaries and recipients to federal payroll data. Such matches would provide SSA with more timely data to help SSA systematically and more effectively identify federal employees who are likely to incur overpayments. We provided a draft of this report to SSA and DOT for comment. DOT stated that it did not have comments on the report. SSA's comments, along with our responses, are reprinted in appendix IV, and its technical comments were incorporated throughout the report as appropriate. SSA agreed with all our recommendations. SSA stated that it will evaluate the feasibility of using the AERO process. In addition, SSA stated that it will review the efficacy of matching federal salary payment records with SSA disability files of DI beneficiaries and SSI recipients. We encourage SSA to follow through on these recommendations. SSA also expressed concern that the overall message of our report is misleading and in some cases factually incorrect. We believe our report accurately describes the cases and our methodology. 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 interested congressional committees, the Commissioner of Social Security, and the Secretary of Transportation. The 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 about this report, please contact me at (202) 512-6722 or [email protected]. Contact points for our Offices of Congressional Relations and Public Affairs may be found on the last page of this report. This appendix presents summary information on fraudulent and improper payments associated with 10 of our 20 case studies. Table 3 shows the remaining case studies that we audited and investigated. As with the 10 cases discussed in the body of this report, the Social Security Administration (SSA) did not prevent improper payment of Social Security disability benefits to these individuals. We referred all 20 cases to SSA management for collection action. The SSA Office of Inspector General has been informed of the 5 cases that we believe committed fraud. We also referred the case involving the SSA employee to the SSA Office of Inspector General for investigation. Our investigations detailed examples of 20 federal employees, commercial drivers, and owners of commercial vehicle companies who fraudulently and/or improperly received disability payments. For the 20 cases, our investigations found the following: For six cases, SSA eventually identified the disability overpayment and sent notification letters to the individuals indicating that they would have to repay the debts. For 10 cases, the individuals were continuing to receive disability benefits as of October 2009. For 14 cases, the individuals claimed to have notified SSA that they had returned to work or that it should terminate the disability benefits because they were no longer eligible because of employment income. However, for only 4 of these 14 cases did SSA have indications in its records that the individuals notified SSA of the return to work or requested termination of disability benefits. For 10 cases, SSA improperly increased the benefit amounts of the disability payments because the individuals had increases in the reported wages on which the disability benefit payments are based. For 18 cases, SSA sent the SSA beneficiaries and recipients the $250 economic stimulus check. For five cases, we believe that there is sufficient evidence that the beneficiaries committed fraud to obtain or continue receiving Social Security disability payments. For each of these five cases, we concluded that the individual withheld employment information from SSA to obtain or continue receiving disability payments. Table 4 provides these attributes for each selected case that we investigated. SSA's failure to promptly prevent improper disability payments for the DI and SSI programs has, in part, contributed to overpayments in these programs. The overpayment of DI and SSI benefits may come from beneficiaries who had their benefits suspended or terminated following a work CDR. Overpayments may also be caused by other types of events, including receipt of workers compensation benefits, being in prison while receiving benefits, and medical improvement to the point where the individual no longer has disabilities. As shown in figure 3, in fiscal year 2004 the total net amount owed to SSA for DI and SSI overpayments was $7.6 billion. This debt has significantly increased through fiscal year 2008, as individuals owed over $10.7 billion in overpayments of DI and SSI benefits. The following are GAO's comments on the Social Security Administration's letter dated May 28, 2010. 1. In the report, we identify those cases where SSA has sent an overpayment notification letter to the individual. However, we do not believe that identifying fraudulent or improper payments after dollars have been disbursed is an effective internal control. Our work across the government has shown that once fraudulent or improper payments are made, the government is likely to only recover pennies on the dollar. Preventive controls are the most efficient and effective. 2. In the report, we state that to adequately assess an individual's work status, a detailed evaluation of all the facts and circumstances should be conducted. This evaluation would include contacting the beneficiary and the beneficiary's employer, obtaining corroborating evidence such as payroll data and other financial records, and evaluating the beneficiary's daily activities. Based on this evaluation, a determination can be made on whether the individual is entitled to continue to receive SSA disability payments or whether such payments should be suspended. As such, our analysis provides an indicator of potentially improper or fraudulent activity related to federal employees, commercial drivers, and owners of commercial vehicle companies receiving SSA disability payments. 3. Our report described two cases of transportation drivers and owners who fraudulently and/or improperly received SSA disability payments. We do not believe that a change to the title is necessary. 4. We believe that SSA should perform the match with more current federal payroll records to determine the efficacy of matching federal salary payment records with SSA disability files of DI beneficiaries and SSI recipients. 5. We revised the report to address SSA's specific comment. 6. IRS provides summary earnings data for a calendar year. We have previously reported that the IRS earnings data used by SSA in its enforcement operations are typically 12 to 18 months old when SSA first receives them, thus making some overpayments inevitable. The federal payroll data provide detailed earnings information for each pay period (e.g., all 26 pay periods for a fiscal year). We believe that these data are more useful in the determination of whether continuing disability reviews and redeterminations should be conducted and could be more current. 7. We believe the footnote is appropriate for this report. 8. As we stated in the report, SSA has the authority to charge interest and penalties, but SSA did not do so on any of its agreements with beneficiaries in our case studies. 9. The American Recovery and Reinvestment Act of 2009 states that these stimulus benefit payments should be provided to individuals who are entitled to DI benefit payments or are eligible for SSI cash benefits. SSA did not seek a formal legal determination as to whether individuals who had their payments suspended because of employment--and were thus not receiving DI or SSI payments during November and December of 2008 or January of 2009--should receive these stimulus payments. We continue to believe that a question exists as to whether these payments were proper and believe that SSA should have at least sought a legal opinion before making the payments. 10. IRS may well collect some of these stimulus benefits payments through a reduction of the "Making Work Pay" tax credit. We simply stated the magnitude of the stimulus payments made to those individuals covered under the extended period of eligibility. However, we believe that relying on the IRS offset is not an effective internal control activity. 11. Our estimated overpayment amount was based on our review of detailed payroll records and discussion with the SSA beneficiary. We believe that our estimated overpayment is accurate. 12. Our estimated overpayment amount was based on our review of detailed payroll records and discussion with the SSA beneficiary. Detailed payroll records showed that the beneficiary's earnings were never below the substantial gainful activity threshold. As such, our estimated overpayment is about $25,000.

The Social Security Administration (SSA) administers two of the nation's largest cash benefits programs for people with disabilities: the Social Security Disability Insurance (DI) program, which provides benefits to workers with disabilities and their family members, and the Supplemental Security Income (SSI) program, which provides income for individuals with disabilities who have limited income and resources. In 2008, SSA provided about $142 billion in financial benefits for these two programs. As part of the American Recovery and Reinvestment Act of 2009, the federal government also paid $250 to each SSA recipient, such as DI beneficiaries, SSI recipients, and old-age retirement beneficiaries. GAO was asked to (1) determine whether federal employees and commercial drivers and company owners may be improperly receiving disability benefits and (2) develop case study examples of individuals who fraudulently and/or improperly receive these benefits. To do this, GAO compared DI and SSI benefit data to civilian payroll records of certain federal agencies and carrier/driver records from the Department of Transportation (DOT) and 12 selected states. GAO also interviewed SSA disability beneficiaries and recipients. GAO analysis of SSA and federal salary data found that there are indications that about 1,500 federal civilian employees may have improperly received benefits. In addition, GAO obtained data from 12 selected states and found that 62,000 individuals received or had renewed commercial driver's licenses after SSA determined that the individuals met the federal requirements for full disability benefits. Under DOT regulations, these individuals' eligibility must be medically certified every 2 years. Lastly, GAO found about 7,900 individuals with registered transportation businesses who were receiving SSA disability benefits. SSA regulations allow certain recipients to work and still receive their disability benefits. Thus, each case would require an investigation to determine whether there were fraudulent payments, improper payments, or both. The GAO analyses provide an indicator of potentially improper and fraudulent activity related to SSA benefits for federal employees, commercial drivers, and registrants of commercial vehicle companies. SSA currently does not perform a federal payroll or DOT records match to identify individuals improperly receiving benefits. GAO nonrepresentatively selected and investigated 20 examples of individuals who improperly and in some cases fraudulently received disability payments. For these 20 cases, SSA did not have the processes to effectively prevent improper and/or fraudulent payments. To see video clips of three individuals working at their federal jobs, see http://www.gao.gov/products/GAO-10-444 . GAO identified several issues arising from the investigations. For example, SSA continued to improperly pay individuals who informed SSA of their employment. Using a process called Automated Earnings Reappraisal Operations (AERO), SSA examined the earnings for several individuals and automatically increased these individuals' disability payments because of raises in salary from their federal employment. SSA officials stated that they currently do not use AERO to identify individuals who have returned to work. In addition, 18 individuals received $250 stimulus payments while they were improperly receiving SSA disability payments. GAO makes two recommendations for SSA to detect and prevent fraudulent and improper payments. SSA agreed with our recommendations, but disagreed with some facts presented.

streamline the flow of information integral to the operation of the health care system while protecting confidential health information from inappropriate access, disclosure, and use. HIPAA required the Secretary of HHS to submit recommendations to the Congress on privacy standards, addressing (1) the rights of the individual who is the subject of the information; (2) procedures for exercising such rights; and (3) authorized and required uses and disclosures of such information. HIPAA further directed that if legislation governing these privacy standards was not enacted within 3 years of the enactment of HIPAA--by August 21, 1999--the Secretary should issue regulations on the matter. HHS submitted recommendations to Congress on September 11, 1997, and when legislation was not enacted by the deadline, issued a draft regulation on November 3, 1999. After receiving over 52,000 comments on the proposed regulation, HHS issued a final regulation on December 28, 2000. Two key provisions in HIPAA defined the framework within which HHS developed the privacy regulation. HIPAA specifically applies the administrative simplification standards to health plans, health care clearinghouses (entities that facilitate the flow of information between providers and payers), and health care providers that maintain and transmit health information electronically. HHS lacks the authority under HIPAA to directly regulate the actions of other entities that have access to personal health information, such as pharmacy benefit management companies acting on behalf of managed care networks. HIPAA does not allow HHS to preempt state privacy laws that are more protective of health information privacy. Also, state laws concerning public health surveillance (such as monitoring the spread of infectious diseases) may not be preempted. HIPAA does not impose limits on the type of health care information to which federal privacy protection would apply. At the time the proposed regulation was issued, HHS sought to protect only health data that had been stored or transmitted electronically, but it asserted its legal authority to cover all personal health care data if it chose to do so. HHS adopted this position in the final regulation and extended privacy protection to personal health information in whatever forms it is stored or exchanged-- electronic, written, or oral. The new regulation establishes a minimum level of privacy protection for individually identifiable health information that is applicable nationwide. When it takes full effect, patients will enjoy new privacy rights, and providers, plans, researchers, and others will have new responsibilities.Most groups have until February 26, 2003, to come into compliance with the new regulation, while small health plans were given an additional year. The regulation protecting personal health information provides patients with a common set of rights regarding access to and use of their medical records. For the first time, these rights will apply to all Americans, regardless of the state in which they live or work. Specifically, the regulation provides patients the following: Access to their medical records. Patients will be able to view and copy their information, request that their records be amended, and obtain a history of authorized disclosures. Restrictions on disclosure. Patients may request that restrictions be placed on the disclosure of their health information. (Providers may choose not to accept such requests.) Psychotherapy notes may not be used by, or disclosed to, others without explicit authorization. Education. Patients will receive a written notice of their providers' and payers' privacy procedures, including an explanation of patients' rights and anticipated uses and disclosures of their health information. Remedies. Patients will be able to file a complaint with the HHS Office for Civil Rights (OCR) that a user of their personal health information has not complied with the privacy requirements. Violators will be subject to civil and criminal penalties established under HIPAA. Providers, health plans, and clearinghouses--referred to as covered entities--must meet new requirements and follow various procedures, as follows: Develop policies and procedures for protecting patient privacy. Among other requirements, a covered entity must designate a privacy official, train its employees on the entity's privacy policies, and develop procedures to receive and address complaints. Obtain patients' written consent or authorization. Providers directly treating patients must obtain written consent to use or disclose protected health information to carry out routine health care functions. Routine uses include nonemergency treatment, payment, and an entity's own health care operations. In addition, providers, health plans, and clearinghouses must obtain separate written authorization from the patient to use or disclose information for nonroutine purposes, such as releasing information to lending institutions or life insurers. without explicit authorization from the individual. Furthermore, where staff administering the group health plan work in the same office as staff making hiring and promotion decisions, access to personal health information must be limited to those employees who perform health plan administrative functions. The regulation sets out special requirements for use of personal health information that apply to both federal and privately funded research: Researchers may use and disclose health information without authorization if it does not identify an individual. Information is presumed to be de-identified by removing or concealing all individually identifiable data, including name, addresses, phone numbers, Social Security numbers, health plan beneficiary numbers, dates indicative of age, and other unique identifiers specified in the regulation. Researchers who seek personal health information from covered entities will have two options. They can either obtain patient authorization or obtain a waiver from such authorization by having their research protocol reviewed and approved by an independent body--an institutional review board (IRB) or privacy board. In its review, the independent body must determine that the use of personal health information will not adversely affect the rights or welfare of the individuals involved, and that the benefit of the research is expected to outweigh the risks to the individuals' privacy. HHS and others within the federal government will have a number of specific responsibilities to perform under the regulations. Although it no longer falls to the states to regulate the privacy of health information, states will still be able to enact more stringent laws. Federal and state public officials may obtain, without patient authorization, personal health information for public health surveillance; abuse, neglect, or domestic violence investigations; health care fraud investigations; and other oversight and law enforcement activities. HHS' OCR has broad authority to administer the regulation and provide guidance on its implementation. It will decide when to investigate complaints that a covered entity is not complying and perform other enforcement functions directly related to the regulations. HIPAA gives HHS authority to impose civil monetary penalties ($100 per violation up to $25,000 per year) against covered entities for disclosures made in error. It may also make referrals for criminal penalties (for amounts of up to $250,000 and imprisonment for up to 10 years) against covered entities that knowingly and improperly disclose identifiable health information. Among the stakeholder groups we interviewed, there was consensus that HHS had effectively taken into account many of the views expressed during the comment period. Most organizations also agreed that the final regulation improved many provisions published in the proposed regulation. At the same time, many groups voiced concerns about the merit, clarity, and practicality of certain requirements. Overall, considerable uncertainty remains regarding the actions needed to comply with the new privacy requirements. Although the regulation, by definition, is prescriptive, it includes substantial flexibility. For example, in announcing the release of the regulation, HHS noted that "the regulation establishes the privacy safeguard standards that covered entities must meet, but it leaves detailed policies and procedures for meeting these standards to the discretion of each covered entity." Among the stakeholder groups we interviewed, the topics of concern centered on conditions for consent, authorization, and disclosures; rules pertaining to the business associates of covered entities; limited preemption of state laws; the costs of implementation; and HHS' capacity to provide technical assistance. in the first place. Another representative commented that public confidence in the protection of their medical information could be eroded as a result of the marketing provisions. One representative also concluded that allowing patients the opportunity to opt out in advance of all marketing contacts would better reflect the public's chief concern in this area. HHS officials told us that this option exists under the provision granting patients the right to request restrictions on certain disclosures but that providers are not required to accept such patient requests. Several organizations questioned whether the scope of the consent provision was sufficient. For example, American Medical Association (AMA) representatives supported the requirement that providers obtain patient consent to disclose personal health information for all routine uses, but questioned why the requirement did not apply to health plans. Plans use identifiable patient information for quality assurance, quality improvement projects, utilization management, and a variety of other purposes. The association underscored its position that consent should be obtained before personal health information is used for any purpose and that the exclusion of health plans was a significant gap in the protection of this information. AMA suggested that health plans could obtain consent as part of their enrollment processes. The American Association of Health Plans (AAHP) also expressed concerns about the scope of consent, but from a different perspective. AAHP officials believe that the regulation may limit the ability of the plans to obtain the patient data necessary to conduct health care operations if providers' patient consent agreements are drawn too narrowly to allow such data sharing. They suggested two ways to address this potential problem. First, if the health plans and network providers considered themselves an "organized health care arrangement," access to the information plans needed could be covered in the consent providers obtained from their patients. Second, plans could include language in their contracts with physicians that would ensure access to patients' medical record information. pharmacies could obtain written consent prior to treatment--that is, filling a prescription for the first time. The American Health Information Management Association (AHIMA) similarly noted the timing issue for hospitals with respect to getting background medical information from a patient prior to admission. HHS officials told us that they believe the regulation contains sufficient flexibility for providers to develop procedures necessary to address these and similar situations. Research organizations focused on the feasibility of requirements for researchers to obtain identifiable health information. The regulation requires them to obtain patient authorization unless an independent panel reviewing the research waives the authorization requirement. Although this approach is modeled after long-standing procedures that have applied to federally funded or regulated research, the regulation adds several privacy-specific criteria that an institutional review board or privacy board must consider. The Association of American Medical Colleges and the Academy for Health Services Research and Health Policy expressed specific concerns over the subjectivity involved in applying some of the additional criteria. As an example, they highlighted the requirement that an independent panel determine whether the privacy risks to individuals whose protected health information is to be used or disclosed are reasonable in relation to the value of the research involved. Several groups were concerned about the requirement for covered entities to establish a contractual arrangement with their business associates-- accountants, attorneys, auditors, data processing firms, among others-- that includes assurances for safeguarding the confidentiality of protected information. This arrangement was HHS' approach to ensure that the regulation's protections would be extended to information shared with others in the health care system. Some provider groups we spoke with were confused about the circumstances under which their member organizations would be considered covered entities or business associates. questioned the need for two covered entities sharing information to enter into a business associate contract. The regulation addresses one aspect of this concern. It exempts a provider from having to enter into a business associate contract when the only patient information to be shared is for treatment purposes. This exemption reflects the reasoning that neither entity fits the definition of business associate when they are performing services on behalf of the patient and not for one another. An example of such an exemption might include physicians writing prescriptions to be filled by pharmacists. Some groups also commented on the compliance challenges related to the business associate arrangement. For example, the representatives of the Joint Commission on Accreditation of Healthcare Organizations (JCAHO) noted that it would need to enter into contracts for each of the 18,000 facilities (including hospitals, nursing homes, home health agencies, and behavioral health providers) that it surveys for accreditation. However, JCAHO officials hope to standardize agreements to some extent and are working on model language for several different provider types. They explained that, because assessing quality of care varies by setting, JCAHO would need more than one model contract. Most of the groups we interviewed cited as a key issue the HIPAA requirement that the privacy standards preempt some but not all state laws. Although every state has passed legislation to protect medical privacy, most of these laws regulate particular entities on specific medical conditions, such as prohibiting the disclosure of AIDS test results. However, a few states require more comprehensive protection of patient records. The patient advocacy groups we spoke with believe that partial preemption is critically important to prevent the federal rule from weakening existing privacy protections. According to the Health Privacy Project, the federal regulation will substantially enhance the confidentiality of personal health information in most states, while enabling states to enact more far-reaching privacy protection in the future. Despite the limited scope of most state legislation at present, other groups representing insurers and employers consider partial preemption to be operationally cumbersome and argue that the federal government should set a single, uniform standard. Organizations that operate in more than one state, such as large employers and health plans, contend that determining what mix of federal and state requirements applies to their operations in different geographic locations will be costly and complex. Although they currently have to comply with the existing mix of state medical privacy laws, they view the new federal provisions as an additional layer of regulation. A representative of AHIMA remarked that, in addition to state laws, organizations will have to continue to take account of related confidentiality provisions in other federal laws (for example, those pertaining to substance abuse programs) as they develop policies and procedures for notices and other administrative requirements. The final regulation withdrew a provision in the proposed regulation that would have required HHS to respond to requests for advisory opinions regarding state preemption issues. HHS officials concluded that the volume of requests for such opinions was likely to be so great as to overwhelm the Department's capacity to provide technical assistance in other areas. However, they did not consider it unduly burdensome or unreasonable for entities covered by the regulation to perform this analysis regarding their particular situation, reasoning that any new federal regulation requires those affected by it to examine the interaction of the new regulation with existing state laws and federal requirements. Several groups in our review expressed concern about the potential costs of compliance with the regulation and took issue with HHS' impact analysis. In that analysis, the Department estimated the covered entities' cost to comply with the regulation to be $17.6 billion over the first 10 years of implementation. Previously, HHS estimated that implementation of the other administrative simplification standards would save $29.9 billion over 10 years, more than offsetting the expenditures associated with the privacy regulation. HHS therefore contends that the regulation complies with the HIPAA requirement that the administrative simplification standards reduce health care system costs. HHS expects compliance with two provisions--restricting disclosures to the minimum information necessary and establishing a privacy official--to be the most expensive components of the privacy regulation, in both the short and the long term. Table 1 shows HHS' estimates of the costs to covered entities of complying with the privacy regulation. Health Privacy: Regulation Enhances Protection of Patient Records but Raises Practical Concerns (Millions of Dollars) We did not independently assess the potential cost of implementing the privacy regulation, nor had the groups we interviewed. However, on the basis of issues raised about the regulation, several groups anticipate that the costs associated with compliance will exceed HHS' estimates. For example, BCBSA representatives contended that its training costs are likely to be substantial, noting that its member plans encompass employees in a wide range of positions who will require specialized training courses. AHA cited concerns about potentially significant new costs associated with developing new contracts under the business associate provision. Other provider groups anticipated spending additional time with patients to explain the new requirements and obtain consent, noting that these activities will compete with time for direct patient care. Several groups, including AHA, AAMC, and AHIMA, expressed concerns about being able to implement the regulation within the 2-year time frame. model forms, policies, and procedures for implementing the regulation. AMA expects to provide guidance to physicians and help with forms and notices on a national level, and noted that the state medical associations are likely to be involved in the ongoing analysis of each state's laws that will be required. Representatives of some organizations we contacted commented that they were unsure how the Department's OCR will assist entities with the regulation's implementation. They anticipate that the office, with its relatively small staff, will experience difficulty handling the large volume of questions related to such a complex regulation. OCR officials informed us that the office will require additional resources to carry out its responsibilities and that it is developing a strategic plan that will specify both its short- and its long-term efforts related to the regulation. To carry out its implementation responsibilities, HHS requested and received an additional $3.3 million in supplemental funding above its fiscal year 2001 budget of approximately $25 million. According to OCR, this amount is being used to increase its staff of 237 to support two key functions: educating the public and those entities covered by the rule about the requirements and responding to related questions. OCR officials told us that its efforts to date include presentations to about 20 organizations whose members are affected by the regulation, a hotline for questions, and plans for public forums. OCR officials said the office had received about 400 questions since the regulation was issued. Most of these inquiries were general questions relating to how copies of the regulation can be obtained, when it goes into effect, and whether it covers a particular entity. Other questions addressed topics such as the language and format to use for consent forms, how to identify organized health care arrangements, whether the regulation applies to deceased patients, and how a patient's identity should be protected in a physician's waiting room. According to OCR officials, technical questions that cannot be answered by OCR staff are referred to appropriate experts within HHS. by stakeholder groups reflects the recent issuance of the regulation. With time, everyone will have greater opportunity to examine its provisions in detail and assess their implications for the ongoing operations of all those affected. In addition, on a more fundamental level, the uncertainty stems from HHS' approach of allowing entities flexibility in complying with its requirements. Although organizations generally applaud this approach, they acknowledge that greater specificity would likely allay some of their compliance concerns. Mr. Chairman and Members of the Committee, this concludes my prepared statement. I will be happy to answer any questions you may have. For future contacts regarding this testimony, please call Leslie G. Aronovitz, Director, Health Care--Program Administration and Integrity Issues, at (312) 220-7600. Other individuals who made contributions to this statement include Hannah Fein, Jennifer Grover, Joel Hamilton, Rosamond Katz, Eric Peterson, Daniel Schwimer, and Craig Winslow. (290019)

Advances in information technology, along with an increasing number of parties with access to identifiable health information, have created new challenges to maintaining the privacy of medical records. Patients and providers alike have expressed concern that broad access to medical records by insurers, employers, and others may result in inappropriate use of the information. Congress sought to protect the privacy of individuals' medical information as part of the Health Insurance Portability and Accountability Act of 1996 (HIPAA). HIPAA included a timetable for developing comprehensive privacy standards that would establish rights for patients with respect to their medical records and define the conditions for using and disclosing identifiable health information. The final privacy regulation offers all Americans the opportunity to know and, to some extent, control how physicians, hospitals, and health plans use their personal information. At the same time, these entities will face a complex set of privacy requirements that are not well understood at this time. Some of the uncertainty expressed by stakeholder groups reflects the recent issuance of the regulation. With time, everyone will have greater opportunity to examine its provisions and assess their implications for the ongoing operations of everyone affected. In addition, on a more fundamental level, the uncertainty stems from HHS' approach of allowing entities flexibility in complying with its requirements. Although organizations generally applaud this approach, they acknowledge that greater specificity would likely allay some of their compliance concerns.

The results of our undercover tests illustrate flaws in WHD's responses to wage theft complaints, including delays in investigating complaints, complaints not recorded in the WHD database, failure to use all available enforcement tools because of a lack of resources, failure to follow up on employers who agreed to pay, and a poor complaint intake process. For example, WHD failed to investigate a child labor complaint alleging that underage children were operating hazardous machinery and working during school hours. In another case, a WHD investigator lied to our undercover investigator about confirming the fictitious businesses' sales volume with the Internal Revenue Service (IRS), and did not investigate our complaint any further. WHD successfully investigated 1 of our 10 fictitious cases, correctly identifying and investigating a business that had multiple complaints filed against it by our fictitious complainants. Five of our 10 complaints were not recorded in WHD's database and 2 of 10 were recorded as successfully paid when in fact the fictitious complainants reported to WHD they had not been paid. To hear selected audio clips of these undercover calls, go to http://www.gao.gov/media/video/gao-09-458t/. Table 1 provides a summary of the 10 complaints that we filed or attempted to file with WHD. We identified numerous problems with the WHD response to our undercover wage theft complaints. Key areas where WHD failed to take appropriate action include delays in investigating complaints, complaints not recorded in the WHD database, failure to use available enforcement tools, failure to follow up on employers who agreed to pay, and a poor complaint intake process. Delays Investigating Complaints. WHD took more than a month to begin investigating five of our fictitious complaints, including three that were never investigated. In one case, the fictitious complainant spoke to an investigator who said she would contact the employer. During the next 4 months, the complainant left four messages asking about the status of his case. When he reached the investigator, she had taken no action on the complaint, did not recall speaking with him and had not entered the complaint in the WHD database. Complaints Not Recorded in Database. Five of our complaints were never recorded in WHD's database. These complaints were filed with four different field offices and included three complaints in which WHD performed no investigative work and two complaints in which WHD failed to record the investigative work performed. For example, we left a message at one WHD office alleging that underage children were working at a meat packing plant during school hours and operating heavy machinery, such as meat grinders and circular saws. With respect to complaints, WHD policy states that those involving hazardous conditions and child labor are its top priority, but a review of WHD records at the end of our work showed that the case was not investigated or entered into WHD's database. In another case, an investigator spoke to the fictitious employer, who refused to pay the complainant the back wages due. The investigator closed the conciliation without entering the case information or outcome into WHD's database. This is consistent with the WHD Southeast regional policy of not recording the investigative work performed on unsuccessful conciliations. The effect of not recording unsuccessful conciliations is to make the conciliation success rate for the regional office appear better than it actually is. The number of complaints that are not entered into WHD's database is unknown, but this problem is potentially significant since 5 out of our 10 bogus complaints were not recorded in the database. Failure to Use All Enforcement Tools. According to WHD staff, WHD lacks the resources to use all enforcement tools in conciliations where the employer refuses to pay. According to WHD policy, when an employer refuses to pay, the investigator may recommend to WHD management that the case be elevated to a full investigation. However, only one of our three fictitious employers who refused to pay was placed under investigation. In one case, our fictitious employer refused to pay and the investigator accepted this refusal without question, informing the complainant that he could file a private lawsuit to recover the $262 due to him. When the complainant asked why WHD couldn't provide him more assistance, the investigator replied, "I've done what I can do, I've asked her to pay you and she can't...I can't wring blood from a stone," and then suggested the complainant contact his Congressman to ask for more resources for WHD to do their work. According to WHD policy and interviews with staff, WHD doesn't have the resources to conduct an investigation of every complaint and prefers to investigate complaints affecting large numbers of employees or resulting in large dollar amounts of back wages. One district director told us that conciliations result from "a mistake" on the part of the employer and he does not like his investigators spending time on them. However, when WHD cannot obtain back wages in a conciliation and decides not to pursue an investigation, the employee's only recourse is to file private litigation. Low wage workers may be unable to afford attorney's fees or may be unwilling to argue their own case in small claims court, leaving them with no other options to obtain their back wages. Failure to Follow Up on Employers Who Agree to Pay. In 2 of our cases, the fictitious employer agreed to pay the back wages due and WHD recorded the conciliation as successful, even when the complainant notified the investigator that he had not been paid. In both cases, the investigator told the employer he was required to submit proof of payment, but only one of the investigators followed up when the employer failed to provide the required proof. The complainant in both cases later contacted the investigator to report he had not been paid. The investigator attempted to negotiate with both fictitious employers, but did not update the case entry in WHD's database to indicate that the complainant never received back wages, making it appear as though both cases were successfully resolved. These two cases cast doubt on whether complainants whose conciliations are marked "agreed to pay" in the WHD database actually received their back wages. Poor Complaint Intake Process. We found that WHD's complaint intake process is time-consuming and confusing, potentially discouraging complainants from filing a complaint. Of the 115 phone calls we made directly to WHD field offices, 87 (76 percent) went directly to voicemail. While some offices have a policy of screening complainant calls using voicemail, other offices have staff who answer the phone, but may not able to respond to all incoming calls. In one case, WHD failed to respond to seven messages from our fictitious complainant, including four messages left in a single week. In other cases, WHD delayed over 2 weeks in responding to phone calls or failed to return phone calls from one of our fictitious employers. At least two WHD offices have no voice mailbox for the office's main phone number, preventing complainants from leaving a message when the office is closed or investigators are unavailable to take calls. One of our complainants received conflicting information about how to file a complaint from two investigators in the same office, and one investigator provided misinformation about the statute of limitations in minimum wage cases. At one office, investigators told our fictitious employee that they only accept complaints in writing by mail or fax, a requirement that delays the start of a case and is potentially discouraging to complainants. In addition, an investigator lied about contacting IRS to determine the annual sales for our fictitious employer, and then told our complainant that his employer was not covered by the FLSA. FLSA applies to employees of enterprises that have at least $500,000 in annual sales or business. Our complainant in this case told the investigator that his employer had sales of $1.5 million in 2007, but the investigator claimed that he had obtained information about the business from an IRS database showing that the fictitious business did not meet the gross revenue threshold for coverage under federal law. Our fictitious business had not filed tax returns and WHD officials told us that their investigators do not have access to IRS databases. A review of the case file also shows that no information from the IRS was reviewed by the investigator. Information related to this case was referred to Labor's Office of the Inspector General for further investigation. WHD successfully investigated a business that had multiple complaints filed against it by our fictitious complainants. WHD identified two separate conciliations ongoing against the same fictitious business, both originating from complaints filed by our fictitious complainants. These conciliations were combined into an investigation, the correct procedure for handling complaints affecting multiple employees. The investigator continued the investigation after the fictitious employer claimed that the business had filed for bankruptcy and attempted to visit the business when the employer stopped returning phone calls. The investigator did not use public records to verify that the employer had filed for bankruptcy, but otherwise made reasonable efforts to locate and investigate the business. Similar to our 10 fictitious scenarios, we identified 20 cases affecting at least 1,160 workers whose employers were inadequately investigated by WHD. We performed data mining on the WHISARD database to identify 20 inadequate cases closed during fiscal year 2007. For several of these cases, WHD (1) did not respond to a complainant for over a year, (2) did not verify information provided by the employer, (3) did not fully investigate businesses with repeat violations, and (4) dropped cases because the employer did not return telephone calls. Ten of these case studies are presented in appendix II. Table 2 provides a summary of 10 case studies closed by WHD between October 1, 2006 and September 31, 2007. Case Study 1: Two garment factory workers filed complaints alleging that their former employer did not pay minimum wage and overtime to its workers. In early August 2006, an employee of the company informed WHD that the company was forcing employees to sign a document stating that they had been paid in compliance with the law before they could receive their paychecks. One of the complainants also confirmed to the WHD investigator that the employer was distributing this document. The next day, an investigator traveled to the establishment to conduct surveillance. The investigator took pictures of the establishment and did not speak with anyone from the company. No additional investigative work was done on this case until almost 2 months later when another investigator visited the establishment and found that the company had vacated the premises. A realty broker at the site informed the investigator that he did not believe the firm had relocated. As a result, WHD closed the investigation. Using publicly available information, we found that the business was active as of January 2009 and located at a different address approximately 3 miles away from its old location. We contacted the factory and spoke with an employee, who told us that the business had moved from the address WHD visited. Case Study 4: In July 2007, WHD received a complaint from a former corrections officer who alleged that a county Sheriff's office did not pay $766 in minimum wage. The WHD investigator assigned to work on this case made two calls to the Sheriff's office over a period of 2 days. Two days after the second call, WHD dropped this case because no one from the employer had returned the calls. WHD did not make additional efforts to contact the employer or validate the allegations. WHD informed the complainant that private litigation could be filed in order to recover back wages. We successfully contacted the Sheriff's office in November 2008. Case Study 5: In May 2007, a non-profit community worker center contacted WHD on behalf of a day laborer alleging that his employer owed him $1,500 for the previous three pay periods. WHD contacted the employer, who stated that the complainant was actually an employee of a subcontractor, but refused to provide the name of the subcontractor. WHD closed the case without verifying the employer's statements and informed the community worker center of the employee's right to file private litigation. WHD's case file indicates that no violations were found and the employer was in compliance with applicable labor laws. According to the Executive Director of the worker center, approximately 2 weeks later, WHD contacted him and claimed that the employer in the complaint had agreed to pay the back wages. When the employer did not pay, the complainant sued the employer in small claims court. During the course of the lawsuit the employer admitted that he owed the employee back wages. The court ruled that the employer owed the employee $1,500 for unpaid wages, the same amount in the original complaint to WHD. Case Study 8: In November 2005, WHD's Salt Lake City District Office received a complaint alleging that a boarding school in Montana was not paying its employees proper overtime. Over 9 months after the complaint was received, the case was assigned to an investigator and conducted as an over the phone self-audit. According to the investigator assigned to the case, WHD was unable to conduct a full investigation because the boarding school was located over 600 miles from Salt Lake City and WHD did not have the resources to conduct an on-site investigation. The employer's self-audit found that 93 employees were due over $200,000 in overtime back wages for hours worked between September 2004 and June 2005. WHD determined that the firm began paying overtime correctly in June 2006 based on statements made by the employer, but did not verify the statements through document review. After the employer's attorney initially indicated that they would agree to pay the over $200,000 in back wages, WHD was unable to make contact with the business for over 5 months. WHD records indicate that the investigator believed that the firm was trying to find a loop hole to avoid paying back wages. In June 2007, one week before the 2-year statute of limitations on the entire back wage amount was to expire, the employer agreed to pay $1,000 out of the $10,800 that had not yet expired. The investigator refused to accept the $1,000 saying that it would have been "like settling the case." WHD recorded the back wages computed as over $10,800 rather than $200,000, greatly understating the true amount owed to employees. WHD noted in the case file that the firm refused to pay the more than $10,800 in back wages, but did not recommend assessing penalties because they felt the firm was not a repeat offender and there were no child labor violations. No further investigative action was taken and the complainant was informed of the outcome of the case. Case Study 10: In June 2003 and early 2005, WHD received complaints against two restaurants owned by the same enterprise. One complaint alleged that employees were working "off the clock" and servers were being forced to give 2.25 percent of their tips to the employer. The other complaint alleged off the clock work, illegal deductions, and minimum wage violations. This case was not assigned to an investigator until May 2005, over 22 months after the 2003 complaint was received. The WHD investigator assigned to this case stated that the delay in the case assignment was because of a backlog at the Nashville District Office that has since been resolved. WHD conducted a full investigation and found that 438 employees were due approximately $230,000 in back wages for minimum wage and overtime violations and the required tip pool. Although tip pools are not illegal, WHD determined that the employer's tip pool was illegal because the company deposited the money into its business account. Further, the firm violated child labor laws by allowing a minor under 16 years old to work more than 3 hours on school days. The employer disagreed that the tip pool was illegal and stated that a previous WHD investigator had told him that it was acceptable. The employer agreed to pay back wages due for the minimum wage and overtime violations, but not the wages that were collected for the tip pool. WHD informed the employer that partial back wages would not be accepted and this case was closed. Information on 10 additional case studies can be found in appendix II. WHD's complaint intake processes, conciliations, and other investigative tools are ineffective and often prevent WHD from responding to wage theft complaints in a timely and thorough manner, leaving thousands of low wage workers vulnerable to wage theft. Specifically, we found that WHD often fails to record complaints in its database and its poor complaint- intake process potentially discourages employees from filing complaints. For example, 5 of our 10 undercover wage theft complaints submitted to WHD were never recorded in the database, including a complaint alleging that underage children were operating hazardous machinery during school hours. WHD's conciliation process is ineffective because in many cases, if the employer does not immediately agree to pay, WHD does not investigate complaints further or compel payment. In addition, WHD's poor record-keeping makes WHD appear better at resolving conciliations than it actually is. For example, WHD's southeast region, which handled 57 percent of conciliations recorded by the agency in fiscal year 2007, has a policy of not recording unsuccessful conciliations in the WHD database. Finally, we found WHD's processes for handling investigations and other non-conciliations were frequently ineffective because of significant delays. Once complaints were recorded in WHD's database and assigned as a case to an investigator, they were often adequately investigated. WHD's complaint intake process is seriously flawed, with both customer service and record-keeping issues. With respect to customer service, wage theft victims may file complaints with WHD in writing, over the phone, or in person. However, our undercover tests showed that wage theft victims can be discouraged to the extent that WHD never even accepts their complaints. We found that in their efforts to screen complaints some WHD staff actually deter callers from filing a complaint by encouraging employees to resolve the issue themselves, directing most calls to voicemail, not returning phone calls to both employees and employers, accepting only written complaints at some offices, and providing conflicting or misleading information about how to file a complaint. For example, the pre-recorded voice message at one office gives callers information on the laws WHD enforces, but when the message ends there are 23 seconds of silence before the call is directed to the voice message system that allows callers to file complaints, creating the impression that the phone call has been disconnected. WHD requires an investigator to speak with the employee before an investigation can be initiated, but a real low wage worker may not have the time to make multiple phone calls to WHD just to file a complaint and may give up when call after call is directed to voicemail and not returned. It is impossible to know how many complainants attempt to file a complaint but are discouraged by WHD's complaint intake process and eventually give up. Regarding WHD's record-keeping failures, we found that WHD does not have a consistent process for documenting and tracking complaints. This has resulted in situations where WHD investigators lose track of the complaints they have received. According to WHD policies, investigators should enter complaints into WHD's database and either handle them immediately as conciliations or refer them to management for possible investigation. However, several of our undercover complaints were not recorded in the database, even after the employee had spoken to an investigator or filed a written complaint. This is particularly troubling in the case of our child labor complaint, because it raises the possibility that WHD is not recording or investigating complaints concerning the well- being and safety of the most vulnerable employees. Employees may believe that WHD is investigating their case, when in fact the information they provided over the phone or even in writing was never recorded. Since there is no record of these cases in WHD's database, it is impossible to know how many complaints are reported but never investigated. According to several WHD District Directors, in conciliations where the employer refuses to pay, their offices lack the resources to investigate further or compel payment, contributing to the failures we identified in our undercover tests, case studies, and statistical sample. When an employer refuses to pay, investigators may recommend that the case be elevated to a full investigation, but several WHD District Directors and field staff told us WHD lacks the resources to conduct an investigation of every complaint and focuses resources on investigating complaints affecting large numbers of employees or resulting in large dollar amounts of back wage collections. Conducting a full investigation allows WHD to identify other violations or other affected employees, attempt to negotiate back wage payment with the employer and, if the employer continues to refuse, refer the case to the Solicitor's Office for litigation. However, in some conciliations, the employer is able to avoid paying back wages simply by refusing. While WHD informs complainants of their right to file a lawsuit against their employers to recover back wages, it is unlikely that most low wage workers have the means to hire an attorney, leaving them with little recourse to obtain their back wages. WHD's conciliation policy also limits the actions staff may take to resolve these cases. For example, WHD staff told us that complaints handled as conciliations must be completed in under 15 days from the time the complaint is assigned to an investigator, and at least one office allows investigators only 10 days to resolve conciliations, which may not allow time for additional follow-up work to be performed. WHD staff in one field office told us they are limited to three unanswered telephone calls to the employer before they are required to drop the case and advise the complainant of his right to file a lawsuit to recover back wages. Staff in several field offices told us that they are not permitted to make site visits to employers for conciliations. WHD investigators are allowed to drop conciliations when the employer denies the allegations and WHD policy does not require that investigators review employer records in conciliations. In one case study, the employee stated that he thought the business was going bankrupt. WHD dropped the case stating that the employer declared bankruptcy and informed the employee of his right to file a private lawsuit to recover back wages. Bankruptcy court records show that the employer had not filed for bankruptcy, and we confirmed that the employer was still in business in December 2008. One WHD investigator told us that it is not necessary to verify bankruptcy records because conciliations are dropped when the employer refuses to pay, regardless of the reason for the refusal. Our undercover tests and interviews with field staff also identified serious record-keeping flaws in which make WHD appear better at resolving conciliations than it actually is. For example, WHD's southeast region, which handled 57 percent of conciliations recorded by WHD in fiscal year 2007, has a policy of not recording investigative work performed on unsuccessful conciliations in the database. WHD staff told us that if employers do not agree to pay back wages, cannot be located, or do not answer the telephone, the conciliation work performed will not be recorded in the database, making it appear as though these offices are able to resolve nearly all conciliations successfully. Inflated conciliation success rates are problematic for WHD management, which uses this information to determine the effectiveness of WHD's investigative efforts. Our undercover tests and interviews with WHD staff also raise questions about the reliability of conciliation information recorded in WHD's database. As illustrated by our undercover tests, when an employer initially agrees to pay in a conciliation but reneges on his promise, WHD investigators did not change the outcome of the closed case in WHISARD to show that the employee did not receive back wages. While some investigators wait for proof of payment before closing the conciliation, others told us that they close conciliations as soon as the employer agrees to pay. Even if the employee later tells the investigator that he has not been paid, investigators told us they do not change the outcome of a closed case in the WHD database. WHD publicly reports on the total back wages collected and the number of employees receiving back wages, but these statistics are overstated because an unknown number of conciliations recorded as successfully resolved in the WHD database did not actually result in the complainant receiving the back wages due. These poor record-keeping practices represent a significant limitation of the population we used to select our statistical sample because the number of conciliations actually performed by WHD cannot be determined and conciliations recorded as successfully resolved may not have resulted in back wages for the employees. As a result, the percentage of inadequate conciliations is likely higher than the failure rate estimated in our sample. We found that 5.2 percent of conciliations in our sample were inadequately conciliated because WHD failed to verify the employer's claim that no violation occurred, closed the case after the employer did not return phone calls, or closed the case after the employer refused to pay back wages. However, we found that many of the conciliations recorded in WHD's database were adequately investigated. One example of a successful conciliation involved a complaint alleging that a firm was not paying minimum wage. The complaint was assigned to an investigator the same day it was filed in September 2007. The WHD investigator contacted the owner, who admitted the violation and agreed to pay back wages of $1,500. The case was concluded the same day when the investigator obtained a copy of the complainant's check from the employer and spoke to the complainant, confirming that he was able to cash the check and had received his back wages. We found WHD's process for handling investigations and other non- conciliations was frequently ineffective because of significant delays. However, once complaints were recorded in WHD's database and assigned as a case to an investigator, they were often successfully investigated. Almost 19 percent of non-conciliations in our sample were inadequately investigated, including cases that were not initiated until more than 6 months after the complaint was received, cases closed after an employer refused to pay, and cases that took over one year to complete. In addition, seven cases failed two of our tests. Six of the cases in our sample failed because they were not initiated until over 6 months after the complaint was received. According to WHD officials, non-conciliations should be initiated within 6 months of the date the complaint is filed. Timely completion of investigations by WHD is important because the statute of limitations for recovery of wages under the FLSA is 2 years from the date of the employer's failure to pay the correct wages. Specifically, this means that every day that WHD delays an investigation, the complainant's risk of becoming ineligible to collect back wages increases. In one of our sample cases, WHD sent a letter to a complainant 6 months after his overtime complaint was filed stating that, because of a backlog, no action had been taken on his behalf. The letter requested that the complainant inform WHD within 2 business days of whether he intended to take private action. The case file shows no indication that the complainant responded to WHD. One month later, WHD assigned the complaint to an investigator and sent the complainant another letter stating that if he did not respond within 9 business days, the case would be closed. WHD closed the case on the same day the letter was sent. Our case studies discussed above and in appendix II also include examples of complaints not investigated for over a year, cases closed based on unverified information provided by the employer, businesses with repeat violations that were not fully investigated, and cases dropped because the employer did not return telephone calls. For example, in one case study, WHD found that 21 employees were due at least $66,000 in back wages for overtime violations. Throughout the investigation, the employer was uncooperative and resisted providing payroll records to WHD. At the end of the investigation, the firm agreed with WHD's findings and promised to pay back wages, but then stopped responding to WHD. The employees were never paid back wages and over a year later, the Solicitor's Office decided not to pursue litigation or any other action in part because the case was considered "significantly old." The failures we identified resulted, in part, from the large backlog of cases in several WHD offices, investigators' failure to compel cooperation from employers, and a lack of certain tools that would facilitate verification of employer statements. In several district offices, a large backlog prevents investigators from initiating cases within 6 months. One office we visited has a backlog of 7 to 8 months, while another office has a backlog of 13 months. Additionally, our analysis of WHD's database shows that one district office did not initiate an investigation of 12 percent of complaints until over one year after the complaint was received, including a child labor complaint affecting over 50 minors. Because the statue of limitations to collect back wages under FLSA is 2 years, WHD is placing complainants at risk of collecting only a fraction of the back wages they would have been able to collect at the time of the complaint. WHD also failed to compel records and other information from employers. While WHD Regional Administrators are legally able to issue subpoenas, WHD has not extended this ability to individual investigators, who therefore depend on employers to provide records and other documentation voluntarily. In cases where public records are available to verify employer statements, WHD investigators do not have certain tools that would facilitate access to these documents. For example, we used a publicly-available online database, Public Access to Court Electronic Records (PACER), to determine that an employer who claimed to have filed for bankruptcy had not actually done so. However, there is no evidence in the case file that the WHD investigator performed this check. WHD officials told us that its investigators do not receive training on how to use public document searches and do not have access to databases containing this information such as PACER. We found that, once complaints were recorded in WHD's database and assigned as a case to an investigator in a timely manner, they were often successfully investigated. As discussed above, WHD does not record all complaints in its database and discourages employees from filing complaints, some of which may be significant labor violations suitable for investigation. In addition, many cases are delayed months before WHD initiates an investigation. However, our sample identified many cases that were adequately investigated once they were assigned to an investigator. Specifically, 81.2 percent of the non-conciliations in our sample were adequately investigated. One example of a successful investigation involved a complaint alleging that a firm was not paying proper overtime was assigned to an investigator the same day it was filed in April 2007. The WHD investigator reviewed payroll records to determine that the firm owed the complainant back wages. The case was concluded within 3 months when the investigator obtained a copy of the complainant's cashed check, proving that he had been paid his gross back wages of $184. This investigation clearly shows that the Department of Labor has left thousands of actual victims of wage theft who sought federal government assistance with nowhere to turn. Our work has shown that when WHD adequately investigates and follows through on cases they are often successful; however, far too often many of America's most vulnerable workers find themselves dealing with an agency concerned about resource limitations, with ineffective processes, and without certain tools necessary to perform timely and effective investigations of wage theft complaints. Unfortunately, far too often the result is unscrupulous employers taking advantage of our country's low wage workers. Mr. Chairman and Members of the Committee, this concludes our statement. We would be pleased to answer any questions that you or other members of the committee may have at this time. For further information about this testimony, please contact Gregory D. Kutz at (202) 512-6722 or [email protected] or Jonathan Meyer at (214) 777- 5766 or [email protected]. Individuals making key contributions to this testimony included Erika Axelson, Christopher Backley, Carl Barden, Shafee Carnegie, Randall Cole, Merton Hill, Jennifer Huffman, Barbara Lewis, Jeffery McDermott, Andrew McIntosh, Sandra Moore, Andrew O'Connell, Gloria Proa, Robert Rodgers, Ramon Rodriguez, Sidney Schwartz, Kira Self, and Daniel Silva. Contact points for our Offices of Congressional Relations and Public Affairs may be found on the last page of this testimony. To review the effectiveness of WHD's complaint intake and conciliation processes, GAO investigators attempted to file 11 complaints about 10 fictitious businesses to WHD district offices in Baltimore, Maryland; Birmingham, Alabama; Dallas, Texas; Miami, Florida; San Jose, California; and West Covina, California. These field offices handle 13 percent of all cases investigated by WHD. The complaints we filed with WHD included minimum wage, last paycheck, overtime, and child labor violations. GAO investigators obtained undercover addresses and phone numbers to pose as both complainants and employers in these scenarios. As part of our overall assessment of the effectiveness of investigations conducted by WHD, we obtained and analyzed WHD's Wage and Hour Investigative Support and Reporting Database (WHISARD), which contained 32,323 cases concluded between October 1, 2006 and September 30, 2007. We analyzed WHD's WHISARD database and determined it was sufficiently reliable for purposes of our audit and investigative work. We analyzed a random probability sample of 115 conciliations and 115 non- conciliations to contribute to our overall assessment of whether WHD's processes for investigating complaints are effective. Because we followed a probability procedure based on random selections, our samples are 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 the 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. To determine whether an investigation was inadequate, we reviewed case files and confirmed details of selected cases with the investigator or technician assigned to the case. In our sample tests, conciliations were determined to be inadequate if WHD did not successfully initiate investigative work within 3 months or did not complete investigative work within 6 months. Non-conciliations were determined to be inadequate if WHD did not successfully initiate investigative work within 6 months, did not complete investigative work within 1 year or did not refer cases in which the employer refused to pay to Labor's Office of the Solicitor. Both conciliations and non-conciliations were determined to be inadequate if WHD did not contact the employer, did not correctly determine coverage under federal law, did not review employer records, or did not compute and assess back wages when appropriate. We gathered additional information about WHD policies and procedures by reviewing training materials and the WHD Field Operations Handbook, conducting walk-throughs of investigative processes with management and interviewing WHD officials. We gathered information about district office policies and individual cases by conducting site visits at the Miami and Tampa, Florida district offices, and conducting telephone interviews with technicians, investigators and district directors in 23 field offices and headquarters officials in Washington, D.C. We also spoke with Labor's Office of the Solicitor in Dallas, Texas and Washington, D.C. To identify macro-level data on WHD complaints, we analyzed data for cases closed between October 1, 2006 and September 30, 2007 by region, district office and case outcome. To identify case studies of inadequate WHD responses to complaints, we data-mined WHISARD to identify closed cases in which a significant delay occurred in responding to a complaint (cases taking more than 6 months to initiate or 1 year to complete), an employer could not be located, or the case was dropped when an employer refused to pay. We obtained and analyzed WHD case files, interviewed WHD officials, and reviewed publicly available data from online databases and the Department of Treasury's Financial Crimes Enforcement Network to gather additional information about these cases. We also interviewed complainants who contacted GAO directly or were referred to us by labor advocacy groups to gather information about WHD's investigation of their complaints. Table 5 provides a summary of ten additional case studies of inadequate Wage and Hour Division (WHD) investigations. These case studies include instances where WHD dropped cases after (1) employers refused to cooperate with an investigation, (2) WHD identified a violation but failed to force employers to pay employees their owed wages, and (3) an employer alleged it was bankrupt when in fact the employer was not.

The mission of the Department of Labor's Wage and Hour Division (WHD) includes enforcing provisions of the Fair Labor Standards Act, which is designed to ensure that millions of workers are paid the federal minimum wage and overtime. Conducting investigations based on worker complaints is WHD's priority. According to WHD, investigations range from comprehensive investigations to conciliations, which consist primarily of phone calls to a complainant's employer. In July 2008, GAO testified on 15 case studies where WHD failed to investigate complaints. This testimony highlights the findings of a follow-up investigation performed at the Committee's request. Specifically, GAO was asked to (1) test WHD's complaint intake process in an undercover capacity, (2) provide additional case study examples of inadequate WHD responses to complaints, and (3) assess the effectiveness of WHD's complaint intake process, conciliations, and other investigative tools. To test WHD's complaint intake process, GAO posed as complainants and employers in 10 different scenarios. To provide case study examples and assess effectiveness of investigations, GAO used data mining and statistical sampling of closed case data for fiscal year 2007. GAO plans to issue a follow-up report with recommendations concerning resource needs and the recording of complaints. GAO also confirmed key findings with WHD officials. GAO found that WHD frequently responded inadequately to complaints, leaving low wage workers vulnerable to wage theft. Posing as fictitious complainants, GAO filed 10 common complaints with WHD district offices across the country. The undercover tests revealed sluggish response times, a poor complaint intake process, and failed conciliation attempts, among other problems. In one case, a WHD investigator lied about investigative work performed and did not investigate GAO's fictitious complaint. At the end of the undercover tests, GAO was still waiting for WHD to begin investigating three cases--a delay of nearly 5, 4, and 2 months, respectively. Similar to the 10 fictitious scenarios, GAO identified 20 cases affecting at least 1,160 real employees whose employers were inadequately investigated. For example, GAO found cases where it took over a year for WHD to respond to a complaint, cases closed based on unverified information provided by the employer, and cases dropped when the employer did not return phone calls. GAO's overall assessment of the WHD complaint intake, conciliation, and investigation processes found an ineffective system that discourages wage theft complaints. With respect to conciliations, GAO found that WHD does not fully investigate these types of complaints or compel employers to pay. In addition, a WHD policy instructed many offices not to record unsuccessful conciliations in its database, making WHD appear better at resolving conciliations than it actually is. WHD's investigations were frequently delayed by months or years, but once complaints were recorded in WHD's database and assigned as a case to an investigator, they were often adequately investigated.

OPS regulates the safety of almost 2.2 million miles of pipelines, which is enough to circle the earth 88 times. There are three primary types of pipelines under OPS' jurisdiction. Natural gas transmission pipelines-- about 322,000 miles--transport natural gas over long distances from sources to communities. An additional 1.7 million miles of natural gas distribution pipelines continue transporting the gas throughout the communities to consumers. Finally, about 155,000 miles of hazardous liquid pipelines generally transport crude oil to refineries and continue to transport the refined oil product, such as gasoline, to product terminals and airports. These pipelines transport the bulk of natural gas and petroleum products in the United States and are the safest mode for transporting these potentially dangerous commodities. Although pipeline incidents resulted in an average of about 24 fatalities per year from 1989 to 2000, the number of pipeline incidents is relatively low when compared with those involving other forms of freight transportation. On average, about 66 people die each year in barge accidents, about 590 in railroad accidents, and about 5,100 in truck accidents. Despite the relative safety of pipelines, pipeline incidents can have tragic consequences, as evidenced by the incidents at Bellingham, WA, and Carlsbad, NM. These incidents, which caused 15 fatalities, highlighted the importance of pipeline safety and the need for more effective oversight by OPS. From 1989 through 2000, the total number of incidents per 10,000 miles of pipeline decreased by 2.9 percent annually, while the number of major pipeline incidents (those resulting in a fatality, an injury, or property damage of $50,000 or more) per 10,000 miles of pipeline increased by 2.2 percent annually. (See fig. 1.) Over the same time period, pipeline mileage increased 1.6 percent annually from 1.9 to 2.2 million miles of pipelines. Traditionally, OPS carried out its oversight responsibility by requiring all pipeline operators to comply with uniform, minimum standards. Recognizing that pipeline operators face different risks depending on such factors as location and the product they carry, OPS began exploring the concept of a risk-based approach to pipeline safety in the mid-1990s. In 1996, the Accountable Pipeline Safety and Partnership Act directed OPS to establish a demonstration program to test a risk-based approach. The Risk Management Demonstration Program went beyond OPS' traditional regulatory approach by allowing individual companies to identify and focus on risks to their pipelines. Since the program's initiation in 1997, OPS has approved six demonstration projects. Partly on the basis of OPS' experience with the Risk Management Demonstration Program, the agency has moved forward with a new regulatory approach that requires pipeline operators to comprehensively identify and address risks to the segments of their pipelines that are located in "high consequence areas" where a leak or rupture would have the greatest impact. This approach requires individual pipeline operators to develop and follow an integrity management program. Each program must contain specific elements, including a baseline assessment of all pipelines that could affect high consequence areas, periodic reassessment of these pipeline segments, prompt action to address any problems identified in the assessments, and measures of the program's effectiveness. Although OPS has issued final rules requiring integrity management programs for operators of hazardous liquid pipelines, the agency has not issued a proposed rule for operators of gas transmission pipelines. In December 2000, OPS issued a final rule for operators of "large" hazardous liquid pipelines, defined as pipeline systems of at least 500 miles. Under this rule, individual operators were required by December 31, 2001 to identify pipeline segments that can affect high consequence areas, and then develop a framework for their integrity management program and a plan for conducting baseline assessments by March 31, 2002. OPS issued a similar rule for operators of "small" hazardous liquid pipelines that are less than 500 miles long on January 16, 2002, with later deadlines. For natural gas transmission pipelines, OPS anticipates issuing a final rule in fall 2002. OPS plans to review and monitor operators' programs for compliance with the integrity management requirements, but will not formally approve operator programs. OPS is currently in the first of a four-phase plan for reviewing and monitoring integrity management programs for operators of large hazardous liquid pipelines. In phase 1--scheduled to be completed by the end of April 2002--OPS is reviewing operators' identification of pipeline segments that impact high consequence areas. During phase 2-- from July 2002 to July 2004--OPS will inspect the more fully developed framework and assessment plans. After July 2004, OPS plans to monitor operators' implementation of their individual programs through periodic inspections in phase 3, and review and respond to notifications from operators of changes in their programs in phase 4. OPS is hiring and training additional inspectors to review and monitor operators' programs. OPS had 56 inspectors in fiscal year 2001 and plans to hire an additional 30 inspectors--a 54-percent increase--by the end of fiscal year 2003. OPS plans to augment its inspection force with contractor and state support as it develops the necessary expertise to review and monitor operators' programs. OPS has also developed a list of training courses that will be required for federal and state inspectors, and it is currently scheduling this training. OPS officials anticipate that it will take about 2 years to provide this training to all federal and state inspectors. In addition to the integrity management programs, OPS is making progress on other initiatives for improving data, involving states, and increasing the use of fines. These initiatives are intended to improve pipeline safety and the agency's oversight. DOT's Inspector General, the National Transportation Safety Board, and others have reported that OPS' data on pipeline incidents and infrastructure are limited and sometimes inaccurate. For example, in the past, OPS' incident report forms have used only five categories of causes for incidents on natural gas distribution pipelines, four categories for those on natural gas transmission pipelines, and seven categories for those on hazardous liquid pipelines. As a result, about one-fourth of all pipeline incidents were attributed to "other causes," which limited OPS' ability to identify and focus on the causes of incidents. In addition, data on the amount of pipeline mileage in various infrastructure categories (such as age or size) are necessary for a meaningful comparison of the safety performance of individual pipeline companies. OPS did not require hazardous liquid pipeline operators to submit this type of data and did not collect complete data from natural gas pipelines. Finally, the information on incident reports filed by operators sometimes changes as the incident investigation proceeds. OPS did not have a procedure for ensuring that operators submitted revised reports when needed. OPS is taking action to collect data that will allow it to more accurately determine the causes of incidents, analyze industry trends, and compare the safety performance of operators. For example, OPS revised its incident report forms in 2001 for hazardous liquid and natural gas transmission incidents to include 25 categories of causes and plans to revise the form for natural gas distribution incidents by the end of 2002. Furthermore, OPS is assigning an inspector in each region to review incident report forms for completeness and accuracy, and has instituted new electronic notification procedures to ensure that operators submit revised incident reports, if necessary. OPS also plans to institute annual reports for hazardous liquid pipeline operators, and is in the process of revising annual report forms for all natural gas pipeline operators. Finally, OPS is conducting studies of incident information to improve its understanding of the causes of incidents. According to OPS officials, most of these improvements will be implemented for 2002 data. According to the Safety Board and industry groups, OPS' initiatives address the underlying data problems and will enable OPS to better understand the causes of incidents so the agency can focus its efforts to improve safety. However, officials from industry groups told us that it will be several years before OPS has sufficient data to analyze trends in incidents. Officials from the Safety Board also noted that these initiatives are merely a first step, and they emphasized that OPS should periodically reassess its forms and procedures and take steps to revise them as necessary. We are evaluating OPS' data improvement initiatives as part of our ongoing work. OPS is allowing more states to help oversee a broader range of interstate pipeline safety activities. Although OPS relies heavily on state inspectors to oversee intrastate pipelines, it reduced its reliance on states to inspect interstate pipelines in the mid-1990s when it moved to a more risk-based, system-wide approach to inspecting pipelines. At that time, OPS believed it would be too difficult to coordinate participation by individual states in the new inspection process. However, in our May 2000 report, we found that allowing states to participate in interstate pipeline safety inspections could improve pipeline safety by increasing the frequency and thoroughness of inspections to detect safety problems. Additionally, state pipeline safety inspectors are likely to be familiar with pipelines in their jurisdictions and the potential risks faced by these pipelines. We recommended that OPS work with state pipeline safety officials to determine which activities would benefit from state participation and, for states that are willing to participate, integrate their activities into the safety program. We also recommended that OPS allow state inspectors to assist in reviewing the integrity management programs developed by the companies that operate in their states to help ensure that these companies have identified and adequately addressed safety risks to their systems. OPS responded to our recommendations in 2001 by encouraging more states to oversee the safety of interstate pipelines in their states. These states may perform a broad range of oversight activities, such as inspections of new construction, oversight of rehabilitation projects and integrity management programs, incident investigation, standard inspections, and participation in nonregulatory program initiatives. Other states that want to participate on a smaller scale may apply for specific, short-term projects, such as inspecting new pipeline construction projects. As of January 2002, 11 states--up from 8 in 2000--have been approved to participate in all oversight activities, and an additional 4 states have been approved to participate on short-term projects. OPS is increasing its use of fines for safety violations, thereby reversing a trend of relying more heavily on less severe corrective actions. From 1990 to 1998, OPS decreased the proportion of enforcement actions in which it proposed fines from about 49 percent to about 4 percent. During this time, the agency increased the proportion of warning letters and letters of concern from about 33 percent to about 68 percent. OPS made this change in order to place more emphasis on "partnering" to improve pipeline safety rather than on punishing noncompliance. As of May 2000, OPS could not determine whether this approach was effective in maintaining compliance with safety regulations. Consequently, we recommended that DOT determine whether OPS' reduced use of fines had maintained, improved, or decreased compliance with pipeline safety regulations. According to OPS officials, the agency is not able to determine the impact of its compliance actions on safety as we recommended because it does not have sufficient data. Nevertheless, OPS concluded that its decreased reliance on fines was perceived negatively by the public and Congress, and that the letters of concern did not allow OPS to adequately address safety concerns. OPS subsequently changed its enforcement policy to make better use of its full range of enforcement tools, including increasing the number and severity of fines. According to OPS officials, the agency plans to collect data that will allow it to link its compliance actions with improvements in safety. We will follow up on OPS' progress in this area during our current review. OPS is taking action on open recommendations from the Safety Board and statutory requirements, but has still not implemented important recommendations and requirements. In May 2000, we reported that OPS historically had the worst response rate--about 69 percent--of any transportation agency to Safety Board recommendations. These recommendations dealt with a variety of issues that are critical for pipeline safety, such as requiring operators to periodically inspect pipelines and install valves to shut down the pipeline in an emergency. Some of these recommendations were more than a decade old. OPS has been working to improve its responsiveness over the last several years by initiating activities in response to the recommendations and improving communications with the Safety Board. The Safety Board has been encouraged by OPS' efforts to improve its responsiveness, particularly in the areas of excavation damage, corrosion control, and data quality. However, the Safety Board remains concerned about the amount of time OPS has been taking to implement recommendations. As of February 2002, OPS had not implemented 42 recommendations, several of which date from the late 1980s and deal with issues considered critical to pipeline safety, such as requiring operators to inspect their pipelines. OPS maintains that its progress is better than the Safety Board indicates. According to OPS officials, the majority of the recommendations deal with integrity management and excavation damage prevention, which the agency's ongoing initiatives should fulfill before the end of 2002. We also reported in May 2000 that OPS had not implemented 22 out of 49 statutory requirements that were designed to improve pipeline safety. Similar to the open Safety Board recommendations, several of these unfulfilled requirements dated from the late 1980s and early 1990s and were related to important pipeline safety issues, such as internal inspections and identification of pipelines in populated or environmentally sensitive areas. Since May 2000, OPS has been working to complete these requirements. As of February 2002, 8 of the 22 requirements were closed as a result of OPS' actions, 9 requirements were still open, and the remaining 5 were reclassified as "closed" because OPS considered them to be superseded by amendments or other requirements or because the agency did not believe it was required to take further action. OPS plans to fulfill the majority of the open requirements before the end of 2002. In our ongoing work, we are examining several issues that could affect OPS' ability to implement its integrity management and data improvement initiatives and, ultimately, fulfill the Safety Board's recommendations and statutory requirements. These issues include (1) performance measures for the integrity management approach, (2) sufficient resources and expertise to oversee operators' integrity management programs, (3) consistent and effective enforcement of integrity management program requirements, and (4) requirements for integrity management programs for operators of gas transmission pipelines. Performance measures: In May 2000, we reported that OPS had not developed programwide performance measures for the Risk Management Demonstration Program, even though the act required such measures to demonstrate the safety benefits of the program. OPS still has not developed such measures. Despite the lack of quantifiable performance measures for the demonstration program, OPS moved forward with integrity management programs and faces the challenge of developing performance measures for this new approach to regulating pipeline safety. Such measures are essential to determine whether the new approach is successful and what improvements may be needed. However, OPS does not have a complete and viable database of information on pipeline incidents and an inventory of pipeline infrastructure on which to establish certain performance measures. OPS has taken steps to improve its data, but it may be several years before the agency can accumulate sufficient data to evaluate trends in the pipeline industry. Resources and expertise: Pipeline operators are in the best position to develop integrity management programs that are tailored to their pipelines; however, it is critical for OPS to have adequate resources and expertise to oversee the programs. After OPS issues a final rule on integrity management programs for natural gas transmission pipelines, the agency estimates that there will be more than 400 hazardous liquid and natural gas pipeline operators with individual programs in various stages of development. OPS must ensure that it has a sufficient number of inspectors to oversee these programs while maintaining its other oversight responsibilities. Moreover, while OPS has resolved to include states in reviewing and monitoring operators' programs, the agency faces a challenge to determine how best to leverage federal and state resources and provide training to state inspectors. Furthermore, OPS' integrity management initiative represents a fundamental shift in how it oversees the pipeline industry. Federal and state inspectors that are accustomed to using a checklist approach for inspecting pipelines for compliance with uniform regulations will have to be trained to evaluate programs that are unique to individual operators. For example, under the new requirements, operators may use a variety of inspection techniques to assess the safety of their pipelines. Inspectors must be familiar with all of these inspection techniques, know when it is appropriate to use them, and know how to interpret the results. Enforcement: The variability of individual operator programs will make it difficult for OPS to enforce the requirements of the integrity management program. OPS' integrity management requirements for hazardous liquid pipelines allow pipeline operators flexibility to design and implement integrity management programs based on pipeline-specific conditions and risks. However, this flexibility will result in unique programs for each operator and require more judgment on the part of inspectors. To ensure that the program requirements are consistently and effectively enforced, OPS is developing a comprehensive set of inspection protocols that are intended to provide clear criteria to inspector staff for evaluating the adequacy of operator actions and making enforcement decisions. As noted previously, OPS believes its staff will need increased training and expertise to make these types of judgments.

The Office of Pipeline Safety (OPS) oversees 2.2 million miles of pipelines that transport potentially dangerous materials, such as oil and natural gas. OPS has been slow to improve its oversight of the pipeline industry and implement critical pipeline safety improvements. As a result, OPS has the lowest rate of any transportation agency for implementing the recommendations of the National Transportation Safety Board. In recent years, OPS has taken several steps to improve its oversight of the pipeline industry, including requiring "integrity management" programs for individual operators to assess their pipelines for risks, take action to mitigate the risks, and develop program performance measures. OPS has also (1) revised forms and procedures to collect more complete and accurate data, which will enable OPS to better assess the causes of incidents and focus on the greatest risks to pipelines; (2) allowed more states to oversee a broader range of interstate pipeline safety activities; and (3) increased the use of fines. OPS has made progress in responding to recommendations from the Safety Board and statutory requirements, but some key open recommendations and requirements, such as requiring pipeline operators to periodically inspect their pipelines, are now more than a decade old. OPS faces challenges that include (1) developing performance measures for the integrity management approach, (2) ensuring sufficient resources and expertise to oversee operators' integrity management programs, (3) providing consistent and effective enforcement of integrity management program requirements, and (4) issuing requirements for integrity management programs for operators of gas transmission pipelines.

Generally, a public company's board of directors is responsible for managing the business and affairs of the corporation, including representing a company's shareholders and protecting their interests. Corporate boards range in size and according to a 2013 survey of public companies, the average board size was about nine directors, with larger companies often having more. Corporate boards are responsible for overseeing management performance on behalf of shareholders and selecting and overseeing the company's CEO, among other duties, and directors are compensated for their work. The board of directors generally establishes committees to enhance the effectiveness of its oversight and focus on matters of particular concern. See figure 1 for common corporate board committees and their key duties. Research and other literature provide a number of reasons as to why it is important for corporate boards to be diverse. For instance, research has shown that the broader range of perspectives represented in diverse groups require individuals to work harder to come to a consensus, which can lead to better decisions. Some research has found that gender diverse boards may have a positive impact on a company's financial performance, but other research has not. These mixed results depend, in part, on differences in how financial performance was defined and what methodologies were used. Various reports on board diversity also highlight that diverse boards make good business sense because they can better reflect the employee and customer base, and they can tap into the skills of a wider talent pool. Publicly traded companies are required by the SEC to disclose to their shareholders certain corporate governance information for shareholder meetings if action is to be taken with respect to the election of directors. Companies disclose this information in proxy statements that are filed with the SEC.The SEC's mission includes protecting investors, and disclosure is meant to provide investors with important information about companies' financial condition and business practices for making informed investment and voting decisions. Investors owning shares in a company generally have the ability to participate in corporate governance by voting on who should be a member of the board of directors. In December 2009, the SEC published a rule that requires companies to disclose certain information on board diversity in proxy statements filed with the Commission if action is to be taken with respect to the election of directors, including whether, and if so how, boards consider diversity in the director nominating process. Also, if boards have a policy for considering diversity when identifying director nominees, they must disclose how this policy is implemented and how the board assesses the effectiveness of its policy. According to various publications on corporate governance or gender diversity, several countries are implementing measures to address gender diversity in the boardroom such as: Quotas. Some countries, such as Germany and Norway, among several other countries, have government quotas to increase the percentage of women on boards. For example, Germany requires that 30 percent of board seats at certain public companies be allocated for women and Norway requires that 40 percent be allocated for women. Disclosure policies. Other countries, such as Australia and Canada, have adopted "comply or explain" disclosure arrangements. Under such arrangements, if companies choose not to implement or comply with certain recommendations or government-suggested approaches related to board diversity-- such as establishing a diversity policy--they must disclose why. Voluntary approaches. The United Kingdom has aimed to increase the representation of female directors through a voluntary, target-based approach rather than through the use of government-mandated interventions. As part of this effort, the government worked with leading companies, investors, and search firms to encourage the adoption of a set of recommendations to increase representation of women on boards. These recommendations included, for example, that certain companies achieve a minimum of 25 percent women on boards by 2015 and publicly disclose the proportion of women on the company's board, management, and workforce. In addition, executive search firms were encouraged to draw up a voluntary code to address gender diversity and best practices covering relevant search criteria for board directors. Selected search firms in the United Kingdom have entered into a voluntary Code of Conduct to address gender diversity on boards in their search processes, including trying to ensure that at least 30 percent of proposed candidates are women. Based on our analysis, we found that women's representation on boards of companies in the S&P 1500 has increased steadily over the past 17 years, from about 8 percent in 1997 to about 16 percent in 2014. As figure 2 illustrates, part of what is driving this increase is the rise in women's representation among new board directors--directors who joined the board each year. While the number of female board directors among S&P 1500 companies has been increasing, particularly in recent years, we estimated that it will likely take a considerable amount of time to achieve greater gender balance. When we projected the representation of women on boards into the future assuming that women join boards in equal proportion to men-- a proportion more than twice what it currently is--we estimated it could take about 10 years from 2014 for women to comprise 30 percent of board directors and more than 40 years for the representation of women on boards to match that of men (see fig. 3). Appendix I contains more information about this projection. Even if every future board vacancy were filled by a woman, we estimated that it would take until 2024 for women to approach parity with men in the boardroom. Using 2014 data, we also found that women's representation on boards differed by company size and industry (see fig. 4) and that there were differences in certain characteristics between male and female directors, such as age and tenure (see fig.5). Based on our interviews with stakeholders, analysis of ISS board director data, and our review of relevant literature, we identified various factors that may hinder increases in women's representation on corporate boards: boards not prioritizing diversity in recruitment efforts; lower representation of women in the traditional pipeline for board positions; and low turnover of board seats. Several stakeholders we interviewed suggested boards not prioritizing diversity in identifying and selecting directors is a factor affecting gender diversity on corporate boards. Specifically, 9 of the 19 stakeholders we interviewed cited board directors' tendencies to rely on their personal networks to identify new board candidates as a factor that contributes to women's lower representation. For example, three of the nine stakeholders specifically noted that men tend to network with other men, and given that the majority of board directors are men, this may prevent women from obtaining vacant board seats. Furthermore, 8 of the 19 stakeholders suggested unconscious bias may be a factor affecting the selection of women onto boards. Several stakeholders we interviewed discussed board directors' desire to maintain a certain level of comfort in the boardroom. For example, one stakeholder observed that boards may have a tendency to seek other directors who look and sound like they do. Another noted that boards want to ensure new members "fit in" which may lead them to recruit people they know and can limit gender diversity on boards. We found some indication that boards' appointment of women slows down when they already have one or two women on the board. In 2014, 29 percent of companies in the S&P 500 that had no women on the board added a woman; 15 percent of companies that had one woman on the board added a woman; and 6 percent of companies that had two women on the board added a woman. Small and medium-sized companies generally followed the same pattern. Further, three stakeholders we interviewed specifically suggested that boards may add a "token" woman to appear as though they are focused on diversity without making diversity a priority. Eleven of the 19 stakeholders we interviewed highlighted the low representation of women in the traditional pipeline for board seats--with either CEO or board experience--as another factor affecting the representation of women on boards. According to recent reports, current and former CEOs composed nearly half of new appointments to boards of Fortune 500 companies in 2014, and 4 percent of CEOs in the S&P 1500 in 2014 were women. One CEO we interviewed said that as long as boards limit their searches to the pool of female executives in the traditional pipeline, they are going to have a hard time finding female candidates. Another factor that may help explain why progress for women has been slow and greater gender balance could take time is that boards have only a small number of vacant seats each year. Based on our analysis, we found that board turnover has remained relatively consistent since 1998, with 4 percent of seats in the S&P 1500 filled, on average, by new board directors each year. In 2014, we found that there were 614 new board directors out of 14,064 seats among all companies in the S&P 1500. Seven of the 19 stakeholders we interviewed similarly cited low turnover, in large part due to the long tenure of most board directors, as a barrier to increasing women's representation on boards. Based on relevant literature and discussions with researchers, organizations, and institutions knowledgeable about corporate governance and board diversity, we identified a number of potential strategies for increasing gender diversity on corporate boards (see table 1). While the stakeholders we interviewed generally agreed on the importance of diverse boards many noted that there is no one-size-fits- all solution to addressing diversity on boards and highlighted advantages and disadvantages of various strategies for increasing gender diversity on corporate boards. Potential strategies for encouraging or incentivizing boards to prioritize and address gender diversity as part of their agenda could include: Requiring a diverse slate of candidates to include at least one woman. Eleven stakeholders we interviewed supported boards requiring a gender diverse slate of candidates.Two specifically suggested that boards should aim for slates that are half women and half men. Two of the 11 advocated that boards include more than one woman on a slate of candidates, expressing concern that a board policy requiring that only one woman be included on a slate could lead to tokenism. This was also a concern for three of the five stakeholders who did not support this strategy. Setting voluntary targets. Ten stakeholders we interviewed supported boards setting voluntary diversity targets with two stakeholders citing the importance of having targets or internal goals for monitoring progress. Four stakeholders opposed voluntary targets. For example, one stakeholder thought that boards should consider a diverse slate of candidates but expressed concern over how voluntary diversity targets would work in the context of considering board candidates' skills. Potential strategies for recruiting more female candidates on to boards could include: Expanding board searches. Of the 17 stakeholders who expressed an opinion, all supported expanding board searches beyond the traditional pool of CEO candidates to increase representation of women on boards. Several stakeholders suggested, for example, that boards recruit high performing women in other senior executive level positions, or look for qualified female candidates in academia or the nonprofit and government sectors. According to aggregate Employer Information Report (EEO-1) data, roughly 29 percent of all senior level managers in 2013 were women, suggesting that if boards were to expand their director searches beyond CEOs more women might be included in the candidate pool. Our analysis of EEO-1 data also found that at the largest companies--those with more than 100,000 employees--women comprised 38 percent of all senior-level managers in 2013, up from 26 percent in 2008. In addition, a few stakeholders said boards need to be more open to appointing women who have not served on boards before. One board director said individuals are more likely to be asked to serve on additional boards once they have prior board experience and have demonstrated they are trustworthy. Potential strategies that boards could implement to address the small number of new directors that are appointed to boards each year could include: Expanding board size. Nine stakeholders we interviewed expressly supported expanding board size either permanently or temporarily to include more women, with five specifically supporting this strategy only as a temporary measure.For example, one stakeholder's board temporarily expanded in size from 8 directors to 11 in anticipation of retirements, but the stakeholder was not in favor of permanently expanding the board size. Some stakeholders noted that expanding board size might make sense if the board is not too large but expressed concern about challenges associated with managing large boards. Three stakeholders were not in favor of expanding board size permanently or temporarily to increase the representation of women on boards. Adopting term limits or age limits. Five stakeholders we interviewed supported boards adopting either term or age limits to address low turnover and increase the representation of women. However, most stakeholders were not in favor of these strategies and several pointed out trade-offs to term and age limits. For example, a CEO we interviewed said he would be open to limitations on tenure for board directors, especially as the board appoints younger candidates. However, he said directors with longer tenure possess invaluable knowledge about a company that newer board directors cannot be expected to possess. Many of the stakeholders not in favor of these strategies noted that term and age limits seem arbitrary and could result in the loss of high-performing directors. Conducting board evaluations. Twelve stakeholders we interviewed generally agreed it is good practice to conduct full-board or individual director evaluations, or to use a skills matrix to identify gaps. However, a few thought evaluation processes could be more robust or said that board dynamics and culture can make it difficult to use evaluations as a tool to increase turnover by removing under- performing directors from boards. The National Association of Corporate Directors encourages boards to use evaluations not only as a tool for assessing board director performance, but also as a means to assess boardroom composition and gaps in skill sets. Several stakeholders we interviewed discussed how it is important for boards to identify skills gaps and strategically address them when a vacancy occurs, and one stakeholder said doing so may help the board to think more proactively about identifying diverse candidates. In addition, almost all of the stakeholders we interviewed (18 of 19) indicated that either CEOs or investors and shareholders play an important role in promoting gender diversity on corporate boards. For example, one stakeholder said CEOs may encourage boards to prioritize diversity efforts by "setting the tone at the top" of companies and acknowledging the benefits of diversity. In addition, several stakeholders said that CEOs may serve as mentors for women and sponsor, or vouch for, qualified women they know for board seats. One stakeholder we interviewed developed a program to help women in senior management positions become board-ready and has also recommended qualified women when he was asked to serve on the board of other companies. Nearly all of the stakeholders we interviewed (18 of 19) said that investors play an important role in promoting gender diversity on corporate boards. For example, almost all of the board directors and CEOs we interviewed said that investors or shareholders may exert pressure on the companies they invest in to prioritize diversity when recruiting new directors. According to one board director we interviewed, boards listen to investors more than any other actor, and they take heed when investors bring attention to an issue. While most stakeholders we interviewed emphasized their preference for voluntary efforts by business to increase gender diversity on corporate boards over government mandates such as quotas, several large public pension fund investors and many stakeholders we interviewed (15 of 19) supported improving federal disclosure requirements on board diversity. Stakeholders were generally supportive of the government undertaking efforts to raise awareness about gender diversity on boards or to collect and disseminate information on board diversity. Most stakeholders we interviewed (16 of 19), however, did not support government quotas as a strategy to increase board gender diversity in the United States. Several suggested that quotas may have unintended consequences--boards may strive to meet the quota, but not to exceed it; boards may appoint directors who are not the best fit for the board just to meet the quota; and there may be the perception that women did not earn their board seat because of their skills, but instead were appointed for purposes of meeting a requirement. However, a few stakeholders and other organizations and researchers we interviewed stated that quotas are an effective means of achieving increased representation or that the prospect of quotas may spur companies to take voluntary actions to address gender diversity on boards. While the SEC seeks to ensure that companies provide material information to investors that they need to make informed investment and voting decisions, we found information companies disclose on board diversity is not always useful to investors who value this information. According to SEC's 2014-2018 Strategic Plan, one of the Commission's objectives is to structure disclosure requirements to ensure that investors have access to useful, high-quality disclosure materials that facilitate informed investment decision-making. The SEC notes in its strategic plan that it is helpful for information to be provided in a concise, easy-to- use format tailored to investors' needs. In addition, the SEC acknowledges that the needs of investors may vary and that investors' needs are affected by their backgrounds and goals. Several large public pension fund investors and many of the stakeholders we interviewed (12 of 19) called into question the usefulness of information companies provide in response to SEC's current disclosure requirements. Specifically, in a recent petition to the SEC (investor petition) to improve board nominee disclosure, a group of nine public fund fiduciaries supervising the investment of over $1 trillion in assets stated that some companies have used such broad definitions of diversity that the concept conveys little meaning to investors. In its requirements for company disclosure on board diversity, SEC leaves it up to companies to define diversity in ways they consider appropriate. As a result, there is variation in how much information companies provide in response to the requirements as well as the type of information they provide. A recent analysis of S&P 100 firms' proxy statements from 2010 through 2013 found that most of the companies chose to define diversity to include characteristics like relevant knowledge, skills, and experience. Approximately half of the companies reported defining diversity to include demographic factors such as gender, race, or ethnicity. Figure 6 illustrates the range of information companies provide on board diversity. For example, Company A and Company D provide information on demographic diversity and specifically disclosed the number of women on the board; Company C combined information on gender diversity with other demographic information; and Company B did not provide any numerical information on demographic characteristics, including gender diversity. Furthermore, SEC's requirement for companies to disclose information related to a board policy for considering diversity in the nomination process, if they have such a policy, may not yield useful information. For example, the recent analysis of S&P 100 firms' proxy statements previously mentioned found that 8 of the 100 companies reviewed disclosed the existence of a diversity policy in 2010 through 2013. In addition, according to the analysis, a substantial number of companies disclosed the absence of a policy or were silent on the topic. According to SEC's requirements, if a board does have a policy, then it must provide additional information on how the policy is implemented and assessed, leading some investors and others we interviewed to question whether it creates a disincentive for companies to disclose a policy. The investor petition to the SEC supported improving existing disclosure requirements and requested that the SEC require new disclosures on board diversity specifically to indicate directors' gender, racial, and ethnic diversity in a chart or matrix in addition to their skills and experiences. Those who submitted the investor petition believe there are benefits to diverse boards, such as better managing risk and including different viewpoints, and that having more specific information on individual director diversity attributes is necessary for investors to fully exercise their voting rights. They said that as large investors, they have an interest in electing a slate of board directors who are well-positioned to help carry out a company's business strategy and meet their long-term investment needs, and that for at least some investors, demographic diversity is an important factor to consider when electing board directors. Most of the 19 stakeholders we interviewed (15 of 19) also supported improving SEC rules to require more specific information from public companies on board diversity. In addition to increasing transparency, some organizations and researchers we interviewed highlighted that disclosing information on board diversity may cause companies to think about diversity more and thus may be a useful strategy for increasing pressure on companies to diversify their boards. Twelve stakeholders we interviewed explicitly supported SEC requiring companies to specifically disclose the number of women on the board; five others were not opposed to disclosing this information; and two questioned whether this specificity was necessary as companies already include the names of board directors in their proxy statements or may include photos of directors. While the investor petition acknowledged that some companies provide aggregate board diversity information on gender and race, they said diversity information at the board level is not available for all companies. They also stated that it can be difficult to determine gender diversity through proxy statements and is time-consuming to collect this information on their own. Without specific information on board diversity that is concise and easy-to-use, investors may not be fully informed in making decisions. SEC officials told us they intend to consider the investor petition requesting changes to board diversity disclosure as part of its Disclosure Effectiveness Initiative--an ongoing review of all SEC disclosure requirements to improve them for the benefit of companies and investors. SEC's review of its disclosure requirements provides an opportunity for the agency to solicit broader input on making specific changes to the disclosure requirements on board diversity. We provided a draft copy of this report to the Securities and Exchange Commission and the Equal Employment Opportunity Commission for review and comment. SEC staff provided technical comments that we incorporated, as appropriate. EEOC did not have comments. 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 to the appropriate congressional committees, the Chair of the Securities and Exchange Commission, the Chair of the Equal Employment Opportunity Commission, and other interested parties. In addition, the report will be available at no charge on GAO's website at http://www.gao.gov. If you or your staff should 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. GAO staff who made key contributions to this report are listed in appendix IV. To identify trends in women's representation on corporate boards and characteristics of male and female board directors, we analyzed a dataset from Institutional Shareholder Services, Inc. (ISS) that contained information about individual board directors at each company in the S&P Composite 1500 from 1997 through 2014, the years for which they collected these data. The ISS data include publicly available information on directors compiled from company proxy statements and other U.S. Securities and Exchange Commission (SEC) filings. The data include information such as gender, age, committee memberships, race and ethnicity, and other characteristics. To determine the reliability of the ISS data, we compared it to other analyses of women's board representation to see if our results were comparable, interviewed knowledgeable ISS employees and other researchers who have used ISS data, and conducted electronic testing of the data. In cases where we did find discrepancies in the data, we discussed the issue with ISS employees and either resolved the issue or determined the specific data element was not sufficiently reliable for our analysis and excluded it from our review. Based on our assessment of the reliability of the ISS data generally and of data elements that were critical to our analyses, we determined that they were sufficiently reliable for our analyses. We used ISS data to provide descriptive statistics on characteristics of male and female board directors, including comparing the age and tenure of female board directors to males, and we also presented information on the representation of women by company size and industry. The ISS data divided companies into the S&P 500 (large cap companies), S&P 400 (mid cap companies) and S&P 600 (small cap companies), which enabled us to conduct analyses by company size. The companies that comprise these indices, including the composite S&P 1500, may change each year depending on the value of the company at the time the index is established. Thus, our analysis is a point in time estimate for the index based on the indices as they were in a certain year. The ISS data did not include industry or sector for the companies in the dataset. We used data from the Bloomberg Industry Classification System to identify the industries for the companies in the ISS dataset by matching up the stock market ticker. We were able to make these matches for 96 percent of the director observations in the ISS data. When we could not make a match, it was typically because we could not locate the ticker in the Bloomberg data. This could be the case, for example, if a company experienced a merger or dismantled. In addition to presenting past trends and descriptive statistics on board membership, we used the ISS data to determine the likelihood of a board adding a woman based on the number of women already on the board. Specifically, we computed how the percentage of boards that have added a woman changes with the number of women already on the board. To do this, we determined the proportion of companies with 0, 1, or 2 women on the board that added a woman in that year. While we did not control for other factors, such as industry, we did do this analysis separately for large, medium, and small firms. We also developed two hypothetical projections to illustrate future gender representation on corporate boards. Neither of these projections is meant to be predictive of what will happen over the coming decades. In one scenario, we assumed an equal proportion of men and women join boards each year starting in 2015. In the second scenario, we assumed only women join boards as new board directors beginning in 2015. For both projections, we made the following assumptions based on ISS data on directors in the S&P 1500 from 1997 through 2014: The total number of board directors in the S&P 1500 will stay constant at 14,000 each year, based on the average of the total number of board directors in the S&P 1500 in 2013 and 2014. The total number of new board directors joining companies in the S&P 1500 will stay constant at 600 new directors each year, which is the total average number of new board directors joining companies in the S&P 1500 for the years of our analysis. We used 600 as an indicator of the number of board directors leaving their board positions each year. Women on boards tend to be younger than men and have had less tenure in 2014. Therefore, we wanted to assume that women leave the board at a slightly lower rate than men, so we estimated the proportion of women among the 600 departing board directors in each year would equal the proportion of women who were on boards 10 years prior (when women were less represented). In addition to the affiliations above, the CEOs and board directors we interviewed collectively have experience serving at companies in a wide range of industries, including the following: Agilent Technologies, Inc. Avaya Avon Products, Inc. Inc. Companies Inc. eHealth, Inc. Engility Holdings, Inc. Exelixis, Inc. Integrated Device Technology Time Inc. TJX Companies, Inc. UNUM Corporation Walmart (IDT) ION Media Juno Therapeutics, Inc. Kohl's Corporation Kraft Foods, Inc. Westinghouse Xerox Corporation Yahoo! Inc. In addition to the contact named above, Clarita Mrena (Assistant Director), Kate Blumenreich (Analyst-in-Charge), Ben Bolitzer, and Meredith Moore made significant contributions to all phases of the work. Also contributing to this report were James Bennett, David Chrisinger, Kathy Leslie, James Rebbe, Walter Vance, and Laura Yahn.

Women make up almost half of the nation's workforce, yet research shows that they continue to hold a lower percentage of corporate board seats compared to men. Research highlights advantages to gender diverse boards, and some countries have taken steps to increase board gender diversity. The SEC requires companies to disclose certain information on board diversity. GAO was asked to review the representation of women on U.S. corporate boards. This report examines (1) the representation of women on boards of U.S. publicly-traded companies and factors that may affect it and (2) selected stakeholders' views on strategies for increasing representation of women on corporate boards. GAO analyzed a dataset of board directors at companies in the S&P 1500 from 1997 through 2014; and conducted interviews with a nongeneralizable sample of 19 stakeholders including CEOs, board directors, and investors. GAO selected stakeholders to reflect a range of experiences, among various factors. GAO also reviewed existing literature and relevant federal laws and regulations. GAO is not making recommendations in this report. SEC provided technical comments that were incorporated, as appropriate. The Equal Employment Opportunity Commission had no comments. Representation of women on the boards of U.S. publicly-traded companies has been increasing, but greater gender balance could take many years. In 2014, women comprised about 16 percent of board seats in the S&P 1500, up from 8 percent in 1997. This increase was partly driven by a rise in women's representation among new board directors. However, even if equal proportions of women and men joined boards each year beginning in 2015, GAO estimated that it could take more than four decades for women's representation on boards to be on par with that of men's. Based on an analysis of interviews with stakeholders, board director data, and relevant literature, GAO identified various factors that may hinder women's increased representation among board directors. These include boards not prioritizing recruiting diverse candidates; few women in the traditional pipeline to board service--with Chief Executive Officer (CEO) or board experience; and low turnover of board seats. Stakeholders GAO interviewed generally preferred voluntary strategies for increasing gender diversity on corporate boards, yet several large investors and most stakeholders interviewed (15 of 19) supported improving Securities and Exchange Commission (SEC) disclosure requirements on board diversity. SEC currently requires companies to disclose information on board diversity to help investors make investment and voting decisions. As stated in its strategic plan, one of SEC's objectives is to ensure that investors have access to high-quality disclosure materials to inform investment decisions. A group of large public pension fund investors and many stakeholders GAO interviewed questioned the usefulness of information companies provide in response to SEC's board diversity disclosure requirements. Consequently, these investors petitioned SEC to require specific disclosure on board directors' gender, race, and ethnicity. Without this information, some investors may not be fully informed in making decisions. SEC officials said they plan to consider the petition as part of an ongoing effort to review all disclosure requirements.

CMS's goals for Nursing Home Compare and its Five-Star System are consistent with its strategy to improve the quality of health care by providing transparent information about the quality of health care services, including those delivered in nursing homes. According to the strategy, to achieve better care, patients must be given access to understandable information and decision support tools that help them manage their health and navigate the health care delivery system. Since 1998, CMS has publicly reported information on nursing home quality on its Nursing Home Compare website and has increased the amount of information reported on the website over time. CMS initially reported information only about nursing home characteristics and nursing home health inspection results on Nursing Home Compare. Later, CMS began reporting additional information on the website, such as the ratio of nursing staff to residents, nursing homes' performance on various quality measures, and the number of complaints registered against nursing homes. Additionally, CMS has updated the appearance and functionality of the Nursing Home Compare website over time, with the most significant change being the introduction of the Five-Star System in 2008. In December 2008, CMS made the Five-Star System available to the public on its Nursing Home Compare website in order to help consumers compare nursing homes more easily. The Five-Star System assigns each nursing home participating in the Medicare or Medicaid programs an overall "star" rating, ranging from one to five. Nursing homes with five stars are considered to have much above average quality, while nursing homes receiving one star are considered to have much below average quality. Calculation of the overall star rating is based on separate ratings that nursing homes receive for each of three components: health inspections, staffing, and quality measures. Health inspection rating. CMS contracts with state survey agencies to conduct unannounced, on-site nursing home health inspections-- known as standard surveys--to determine whether nursing homes meet federal quality standards. Every nursing home receiving Medicare or Medicaid payment must undergo a standard survey not less than once every 15 months, and the statewide average interval for these surveys must not exceed 12 months. State surveyors also conduct complaint investigations in response to allegations of quality problems. If nursing homes are found to be out of compliance with any requirements, state surveyors issue deficiency citations that reflect the scope (number of residents affected) and severity (level of harm to residents) of the deficiency. Surveyors conduct revisits to the nursing home to ensure that the deficiencies identified have been corrected. A nursing home's health inspection rating is relative to other nursing homes' health inspection ratings in their state. As such, health inspection ratings are assigned to generally achieve the following distribution within each state: the top 10 percent of nursing homes receive five stars, the bottom 20 percent receive one star, and the middle 70 percent of nursing homes receive two, three, or four stars. Staffing rating. Nursing homes self-report staffing hours worked for a 2-week period at the time of the standard survey. CMS converts the reported point-in-time staffing hours for nursing staff--registered nurses, licensed practical nurses, and certified nursing assistants-- into measures that indicate the number of registered nurse and total nursing hours per resident per day. CMS adjusts the staffing levels for differences in the level of complexity of nursing services required to care for residents across nursing homes--referred to as resident acuity. Each nursing home's staffing rating is assigned based on how its total nursing and registered nurse staffing levels compare to the distribution of staffing levels for freestanding homes in the nation and staffing level thresholds identified by CMS. Quality measure rating. Nursing homes regularly collect assessment information on all their residents, including information on the residents' health, physical functioning, mental status, and general well-being. Nursing homes self-report this information to CMS. CMS uses some of the assessment information to measure the quality of certain aspects of nursing home care, such as the prevalence of pressure sores and changes in residents' mobility. At the time of our analysis, CMS calculated this rating for each nursing home based on 11 of the 18 quality measures posted on Nursing Home Compare. Information on the remaining 7 quality measures is posted on the website but not used in the calculation of the rating. A nursing home's quality measure rating is assigned based on national thresholds established by CMS. The overall star rating is calculated using a process that combines the star ratings from the health inspection, staffing, and quality measure components--with the greatest weight given to the health inspection rating. The overall rating is assigned based on the following steps: 1. Start with the number of stars for the health inspection rating. 2. Add one star if the staffing rating is four or five stars and also greater than the health inspection rating. Subtract one star if the staffing rating is one star. The overall rating cannot go above five stars or below one star. 3. Add one star if the quality measure rating is five stars. Subtract one star if the quality measure rating is one star. The rating cannot go above five stars or below one star. See figure 1 for an example of how a nursing home's overall rating is calculated. CMS updates the ratings on a monthly basis; however, a particular home's overall rating will only change if it had new data that affected any one of the component ratings. For example, when a home has a health inspection survey, either a standard survey or a complaint investigation, the deficiency data from the survey will become a part of the calculation for the health inspection rating and the overall rating will also be adjusted, if necessary. We found that CMS utilizes three standard mechanisms for collecting information on the use of the Nursing Home Compare website: website analytics, website user surveys, and website usability tests. Website analytics. CMS utilizes website analytics to gauge the performance of Nursing Home Compare and improve the visibility of the website in search engine listings. Through this mechanism, CMS is able to track data such as how many users, sessions, bounce rates, and page views Nursing Home Compare has per year. For example, these data show that from 2013 to 2015, Nursing Home Compare averaged 1.5 million sessions per year and 914,000 users per year. The website analytics also track the average session duration and the average number of pages that are viewed per session. For this same time period, the average session duration was 5.8 minutes and the average number of pages that were viewed per session was 4.8. Website user surveys. CMS utilizes website user surveys to collect information about Nursing Home Compare users, how they use the site, and their opinions about the site. According to CMS officials, these surveys, which CMS began using in 2013, randomly pop up in web browsers to 50 percent of the website's visitors. The surveys ask the user to identify themselves (for example, a caregiver or a researcher), the primary purpose for visiting the site, and the user's experience in using the site. These surveys provide the only way CMS determines the type of users who come to the website, according to CMS officials. In October 2015, website survey data showed that 59 percent of users of Nursing Home Compare identified themselves as consumers, and the majority of users report coming to the site to research or select nursing homes for themselves or a family member. Website usability tests. CMS utilizes usability tests--in the form of one-on-one sessions with nine consumer participants--to assess how well consumers navigate the website. CMS has conducted four usability tests from 2011 through 2015. The tests focus on the navigability of the website; however, they also include a few background questions about consumer use. For example, the usability tests ask if participants were previously aware of Nursing Home Compare, what factors consumers find most important in searching for a nursing home, and what expectations consumers have for a nursing home comparison website such as this. In addition to these three standard mechanisms, CMS officials also told us that they gain insight into the use of Nursing Home Compare by holding ad-hoc meetings with a variety of stakeholders that are familiar with Nursing Home Compare to discuss the website. CMS held three stakeholder meetings from 2010 through 2015. According to CMS documents, stakeholders have included groups that represent consumers, such as ombudsmen, consumer advocate groups, provider advocate groups, and others that are involved in nursing home services. Information exchanged during stakeholder meetings includes CMS presentations on pending changes, such as the development of new quality measures, and stakeholder feedback. The mechanisms that CMS utilizes to collect information about the use of Nursing Home Compare provide the agency with valuable information. However, these mechanisms do not provide CMS with information on the usefulness of the website to a broader range of consumers. Specifically, the usability tests are not designed to assess the website's usefulness to consumers, and the website analytics and user surveys only provide information about consumers who access the website. Therefore, the mechanisms do not provide CMS with information on nursing home consumers who have not used the website because they are unaware of it, or choose not to use it, as well as the reasons why. In stakeholder interviews we conducted, some nursing home stakeholders noted that many consumers do not know about the website and that consumers collect information from other sources. Obtaining information from consumers who do not access Nursing Home Compare would likely require the dedication of resources to, for instance, consumer-oriented focus groups or broader surveys. We identified five key areas of improvement CMS could make to Nursing Home Compare in order to make it more helpful for consumers. Specifically, we reviewed over 300 individual improvements identified in CMS documents--in part resulting from the mechanisms described above--and in interviews with national and state stakeholders; for example, one internal CMS analysis included over 40 individual recommendations for improvement. Through our analysis, we found the key areas of improvement are: 1) explanation of how to use the website, 2) additional information about the nursing home, 3) community and consumer outreach, 4) clarity of the website, and 5) navigability of the website. Table 1 below provides more information about these key areas of improvements. For example, the first improvement addresses the fact that the Nursing Home Compare website does not currently have an explanation of how to use the website prominently displayed on its home page; there is not an introduction to the website, or an obvious explanation of how it should be used. According to many stakeholders, Nursing Home Compare is a valuable tool for consumers but a few specified that additional explanatory information is needed; without such information, the usefulness of the website may be limited. Although CMS has identified the need for improvements to its Nursing Home Compare website, the agency does not have a systematic process that prioritizes recommended website changes and sets a timeline for implementation. In response to a recommendation in our 2012 report, in August 2013, CMS developed a strategic plan for evaluating the usability of Nursing Home Compare. The plan described tasks, including an expert review of the website, an analysis of competitor websites, and usability testing, some of which resulted in the formal mechanisms that CMS now has in place to collect information on the use of Nursing Home Compare, as previously described. However, CMS does not have a documented and systematic approach describing how to prioritize recommended changes to the website and assessing the potential improvements. Instead, officials described a fragmented approach to reviewing and implementing recommended website changes that may include verbal discussions of various factors, such as which changes would provide the broadest impact. CMS officials stated that their current approach to handling website changes had been working well, but since the website has become more complex in recent years, they acknowledged the need for a more formalized approach in addressing identified website changes. CMS has stated the goal for its Nursing Home Compare website as assisting consumers in finding and comparing information about nursing home quality. In addition, under federal internal control standards, management should address identified program deficiencies on a timely basis and evaluate appropriate actions for improvement. However, in the absence of an established process to evaluate and prioritize implementation of improvements, CMS cannot ensure that it is fully meeting its goal for the website. Our analysis for the Five-Star System's ratings data found that its overall rating provided consumers with distinctions between the highest and lowest performing nursing homes for health inspections in most states. Specifically, we found that, in 37 out of 50 states, homes that received an overall rating of 5-stars consistently had higher health inspection scores-- the component measure that most significantly contributes to the overall rating--than homes that received an overall rating of 1-star. This means that in the 37 states, consumers can safely assume that, in the case of health inspections, the performance of any nursing home in their state with an overall high 5-star rating is better than the performance of any home with an overall low 1-star rating. Some stakeholders we spoke with agreed that distinctions between nursing homes are clearest at the extremes. For example, one stakeholder noted that the Five-Star System is best at helping consumers identify the poorest performing homes to avoid. Stakeholders also noted the value of having a national resource that uses standardized and objective nursing home quality information. However, we also identified four factors that may inhibit the ability of consumers to use the Five-Star System ratings as an easy way to understand nursing home quality and identify high- and low- performing homes, CMS's stated goal for the Five-Star System. 1. Interpreting overall ratings. As previously described, the Five-Star System's overall rating is calculated using a process that combines three component ratings. However, the formula for combining the components is not intuitive, which can make interpreting overall ratings difficult for consumers by both complicating the comparison of overall ratings and masking the importance of the component ratings. Specifically, the comparison of overall ratings can be complicated because a consumer cannot assume that the performance on a particular component of the higher-rated home is better than that of the lower-rated home. In our review, we generally did not find distinctions in the scores for homes in the same state with adjacent overall ratings--e.g., 2- and 3-star homes--or for homes with middle overall ratings--2-, 3-, and 4-star homes. For example, in one state, 28 percent of homes with a 3-star overall rating had a better health inspection score than the average health inspection score for homes with an overall 4-star rating. Furthermore, the way CMS calculates the overall rating can mask for consumers issues that may be present in the component ratings. A consumer comparing nursing homes will see each home's overall rating and component ratings, but they may not understand the impact each component score has on the overall rating. This could lead a consumer to rely more on the overall rating when their individual needs may require attention to one specific component more than the others. For example, two nursing homes that both have a 4-star overall rating could have opposite quality measure component ratings--one with a low 1-star quality measure rating and the other with a high 5-star quality measure rating. (See fig. 2). Many stakeholders stated that it is difficult to distinguish between nursing homes with adjacent or middle ratings. In addition, some stakeholders expressed concern about the overall rating, with one explaining that often consumers make decisions based on the overall rating without understanding it or looking at the underlying components. According to CMS officials, the overall rating provides a summary of complex information to guide consumers--not an explicit report card--in as simple a way as possible. They also added that by providing individual component ratings, consumers have the ability to dig deeper into the source of the overall rating. 2. Timeliness of ratings data. Each of the three rating components-- which influence the overall star rating--use a unique source of data that are collected from nursing homes at different time intervals. Specifically, the number of stars assigned to a nursing home is a point-in-time picture of performance based on a prior snapshot of the home's performance and may not reflect a nursing home's current status. (See table 2). Some stakeholders we spoke with expressed concern that a consumer may make a decision about a nursing home based on data that does not reflect current conditions in the home. According to CMS officials, a delay is always present due to administrative processes such as validating data prior to being posted. For example, the health inspection component data may be delayed due to additional information from the outcomes of revisits to the nursing home to check that deficiencies have been corrected. CMS officials and stakeholders said the Five-Star System should not be the only source of information a consumer uses; they both encourage consumers to explore additional information including visiting the home. 3. Comparing nursing homes across states. The overall rating and health inspection rating do not allow consumers to compare the quality of homes across states, limiting the ability of the rating system to help consumers who live near state borders or have multistate options where they could place their family members. Because ratings are relative to other nursing homes within a state, homes that receive the highest and lowest ratings in their state may not be the highest or lowest performing homes in another state or nationally. So, a consumer cannot assume that a 5-star nursing home in one state would be rated as a 5-star home in any other state. (See fig. 3). Furthermore, we found that when we recalculated the star ratings using a national distribution rather than a state distribution, homes' ratings often changed, sometimes dramatically. For example, about 23 percent of nursing homes with a 1-star overall rating in December 2015 had improved ratings when compared nationally and about 30 percent of homes with a 5-star overall rating had decreased ratings when compared nationally. When looking at individual states, we found that the nursing homes in some states would fare better or worse under a national rating. Specifically, the percentage of homes receiving an overall 1-star rating doubled in 4 states and the percentage of homes receiving an overall 5-star rating doubled in 9 states. See appendix III for additional information about the results of our analysis. According to CMS Five-Star System documentation, the rating system is not designed to compare nursing homes nationally. Instead, ratings are only comparable for homes in the same state. CMS made the decision to base the health inspection component on the relative performance of homes within the same state primarily due to variation across the states in the execution of the standard surveys. Because the health inspection component most significantly contributes to the overall rating, this means that the overall rating also cannot be compared nationally. However, the addition of national ratings would be helpful for consumers and we have previously made recommendations to CMS that would help decrease survey variation across states. CMS has taken action on many of these recommendations. 4. Lack of consumer satisfaction information in ratings. Because the Five-Star System does not include consumer satisfaction information--a key quality performance measure--the rating system is missing important information that could help consumers distinguish between high- and low- performing nursing homes. We believe consumer satisfaction surveys could be a more direct measure of nursing home satisfaction than other available measures. For example, our analysis of consumer satisfaction data shows that nursing homes with higher overall star ratings did not necessarily have higher resident satisfaction scores or fewer complaints. (See fig. 4). Specifically, our analysis found that the Five-Star System overall ratings for each nursing home in two states that conduct resident satisfaction surveys were only slightly correlated with the percentage of residents that would recommend the home to other consumers--an indicator of consumer satisfaction included on the state surveys. Similarly, when analyzing complaint data for all states--a proxy for consumer satisfaction--we also found only a slight correlation between the total number of consumer complaints registered against a home in each state and the home's overall Five-Star System rating. Many stakeholders told us that they would like to see resident satisfaction included in the Five-Star System. For example, one state stakeholder group explained that they think it is important for a consumer making a nursing home decision to understand how the administration resolves an issue with a resident when one arises. That type of information is not currently captured in the Five-Star System, but could be captured through a resident satisfaction survey, which could strengthen the ratings. According to CMS officials, they recognize that consumer satisfaction is important information, but collecting the data in a consistent, objective way for all of the nursing homes in the country is a challenge. They acknowledged that some states have been able to overcome these implementation challenges and administer statewide nursing home consumer satisfaction surveys. Until consumer satisfaction information is included in the rating system, consumers will continue to make nursing home decisions without the benefit of this key performance measure and may not be choosing the home that would best meet their needs. While we recognize that gathering this information is challenging, CMS has done so in its hospital rating system. Specifically, CMS developed a hospital consumer satisfaction survey with assistance from HHS's Agency for Healthcare Research and Quality--an agency that, among other things, focuses on quality measurement and includes consumer satisfaction as one of its National Quality Measures Clearinghouse's clinical quality measures. In addition to the items discussed above, presentation of the Five-Star System does not prominently display key explanatory information that could help consumers better understand how to use the ratings. Specifically, we found that CMS does not prominently provide descriptions of how to understand the ratings and what consumers should consider when using the ratings or information on how the overall rating is calculated. In addition, CMS clearly discloses the date of the data used to assign stars for the health inspection component, but not for the staffing or quality measure components, and does not prominently state the previously discussed limitation that homes can only be compared within a state. For example, in order to find descriptions of how the overall rating is calculated, consumers must follow links that take them off of their nursing home search and results webpages and, as noted previously, an average webpage visit is less than 6 minutes. Many stakeholders we spoke with explained that consumers often have very little time to make a nursing home decision, and a few noted that it is also a stressful process, therefore making prominent and readily available information crucial. In addition, many stakeholders expressed concerns that consumers may not understand the ratings and how they are calculated. Further, many stakeholders expressed concern about the timeliness of the data, with some noting that consumers were generally unaware of the timing of the data. CMS officials described the tension between keeping the Five-Star System as simple as possible for consumers so that they can quickly understand the ratings and also providing enough information on how and when the ratings are calculated. Collectively, the four factors that hinder consumers' ability to use the Five-Star System ratings, along with the lack of explanatory information provided by CMS, may limit the Five-Star System's ability to meet CMS's goal of providing consumers with an easy way to understand nursing home quality and make distinctions between high- and low- performing homes. Nursing Home Compare and the Five-Star System seek to help consumers choose among nursing homes. Nursing home selection can be a stressful and time-sensitive process, so these are important tools that CMS makes available to the public. However, our review found opportunities for improvement in both the website and the ratings. CMS has given much attention to the website since its inception almost 20 years ago. For example, the agency has put in place mechanisms for reviewing the website's use and has identified numerous improvements that could be made. However, without a systematic process for reviewing options and determining priorities for improvement--currently absent from their efforts--CMS is unable to ensure that the website is meeting its intended goal. A key component of the website is the Five-Star System, containing important quality information on every nursing home so consumers can differentiate between them and choose those that can best meet their needs. Because the Five-Star System contains multiple types of information, compiled from different sources, and has complexities inherent in ratings systems, it can be challenging for consumers to fully understand how to take advantage of the varied information it contains. Additional capability and information not currently included in the rating system could also benefit consumers trying to differentiate between high- and low- performing nursing homes--such as the ability to compare homes nationally and the addition of consumer satisfaction survey information. In addition, prominently displaying explanatory information on how to use the ratings, which does not require users to navigate off the nursing home search and results pages, could help address challenges consumers face when trying to understand the ratings. Absent such enhancements, CMS cannot ensure that the Five-Star System is fully meeting its stated goal of helping consumers easily understand nursing home quality and distinguish between high- and low- performing homes. To strengthen CMS's efforts to improve the usefulness of the Nursing Home Compare website for consumers, we recommend that the Administrator of CMS establish a systematic process for reviewing potential website improvements that includes and describes steps on how CMS will prioritize the implementation of potential website improvements. To help improve the Five-Star System's ability to enable consumers to understand nursing home quality and make distinctions between high- and low- performing homes, we recommend that the Administrator of CMS take the following three actions: add information to the Five-Star System that allows consumers to compare nursing homes nationally; evaluate the feasibility of adding consumer satisfaction information to the Five-Star System; and develop and test with consumers introductory explanatory information on the Five-Star System to be prominently displayed on the home page. Such information should explain, for example, how the overall rating is calculated, the importance of the component ratings, where to find information on the timeliness of the data, and whether the ratings can be used to compare nursing homes nationally. We provided a draft of this report to HHS for its review and comment. HHS provided written comments, which are reproduced in appendix V. In its comments, HHS described the history of the Nursing Home Compare website and the Five-Star System, improvements the agency has made to both, and concurred with three of our four recommendations. In particular, HHS concurred with our recommendations to establish a process for reviewing potential website improvements that describes how it will prioritize their implementation, evaluate the feasibility of adding consumer satisfaction information to the Five-Star System, and develop and test explanatory information on the Five-Star System to be displayed on the home page. HHS did not concur with our recommendation to add information to the Five-Star System that would allow consumers to compare nursing homes nationally. HHS indicated that because of state variation in the execution of standard surveys, it is difficult to compare homes nationally on the health inspection component. They also noted that the Five-Star System is just one of many factors consumers should use when selecting a nursing home. As we describe in this report, efforts have been and should continue to be made to reduce state variation in standard surveys. For example, CMS regional offices are tracking state differences in deficiency citations. We maintain that the ability for consumers to compare nursing homes nationally is critical to making nursing home decisions, especially for those consumers who live near state borders or have multistate options, and that our recommendation remains valid. As agreed with your office, unless you publicly announce the contents of this report earlier, we plan no further distribution of it until 30 days from its date. At that time, we will send copies to the Secretary of HHS. In addition, the report will be available at no charge on the GAO website at http://www.gao.gov. If you or your staff have any questions about this report, please contact me at (202) 512-7114 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 VI. This appendix describes additional details of the data analyses we conducted to examine the Five-Star Quality Rating System (Five-Star System). For this examination, we analyzed data from three sources. We analyzed Five-Star System data from the Centers for Medicare & Medicaid Services (CMS). These data provide detailed rating information on over 15,000 nursing homes included in the Five-Star System from the most recent full quarter available at the time of our analysis, which ended December 2015. Additionally, we analyzed CMS consumer complaint data for a six-month period ending in December 2015. We collected and analyzed these data for all 50 states and Washington, D.C. Furthermore, we collected and analyzed 2015 nursing home resident satisfaction survey data from two of our four selected states that collect survey data. We conducted the following analyses: 1. To determine the extent to which the Five-Star System provides consumers with information distinguishing between high- and low- performing nursing homes, we analyzed December 2015 data from CMS's publicly available Five-Star Scores and Ratings data. Specifically, for each state, we determined the range of scores that underlie each component star rating: for health inspection we used the weighted all cycles score, for staffing we looked at the total adjusted staffing score, and for quality measures we calculated the total quality measure score--for each nursing home's overall rating. We then determined whether, within each state and for each component rating, the scores of the worst performing 5-star nursing homes overlapped with the scores of the best performing 1-star nursing homes. We also conducted this analysis for each combination of the star ratings. 2. To determine the timeliness (or age) of the data used for each component Five-Star ratings for consumers viewing the ratings in December 2015, we analyzed data from CMS's Five-Star Scores and Ratings data for that month downloaded from CMS's website. Specifically, we calculated the average age of the data for each component rating at that point in time. For the health inspection component, we analyzed the standard survey date, but did not analyze the complaint investigation date because a meaningful average age cannot be calculated. 3. To determine the extent to which nursing homes' ratings changed when compared nationally rather than compared only within each state, we analyzed December 2015 data from CMS's Five-Star Score and Ratings data downloaded from CMS's website. Specifically, we recalculated each nursing home's health inspection and quality measure scores that are normally assigned based on state distributions so that they were based on a national distribution (new distribution allotments were based on CMS's state distribution guidelines). We then recalculated each home's overall rating using our new health inspection component rating, our new quality measure rating, and CMS's staffing component rating. In addition, we analyzed the change in overall nursing home ratings when applying the methodology nationally. 4. To determine the relationship between nursing home satisfaction data and CMS's Five-Star ratings, we did the following: a. We used complaints registered against nursing homes by residents, families, ombudsmen, or others as a proxy measurement of satisfaction. Specifically, we analyzed complaint data recorded in CMS's Automated Survey Processing Environment Complaints/Incidents Tracking System from July 1 through December 31, 2015. We examined the last six months of 2015 to provide a fuller picture of each nursing home's routine complaint levels. For each state and nationally, we determined the correlation between each nursing home's total number of registered consumer complaints and its overall Five-Star rating. b. We used the results of 2015 nursing home resident satisfaction surveys from two of our selected states that collect such information. Specifically, we focused on the responses to whether the resident would recommend that nursing home to others as a measure of satisfaction. In one state, this measure was the actual percentage of residents that recommended the home and in the other state it was the ranking of the home based on residents' responses. For both states, we determined the correlation between each nursing home's resident response on the state survey and its overall Five-Star rating. The findings from this analysis cannot be generalized to other states. For all data used in these analyses, we interviewed knowledgeable officials and reviewed related documentation and based on these steps determined that the data were sufficiently reliable to explore the relationship between the overall rating and the component ratings, determine national rating distributions, assess consumer satisfaction information, and describe the age of the data. We held interviews with 30 nursing home stakeholders--eight national stakeholders and 22 state stakeholders from four states (Rhode Island, Georgia, Kansas, and California) we selected based on factors such as variation in geographic region and size (number of nursing homes). These stakeholders represent a range of provider groups, consumer groups, government agencies, and technical experts. We selected organizations in each state and nationally that are relevant to nursing home consumers and providers. Technical experts were identified by their prominence in the nursing home quality research field. In addition, some stakeholders we interviewed identified other groups that would be appropriate to interview. Our interviews included a set of questions regarding consumer use of Nursing Home Compare. Responses to these questions cannot be generalized beyond the stakeholders we interviewed. We found that stakeholders generally could not quantify the number of consumers who use Nursing Home Compare, but most speculated that consumers use the site "a little" to "somewhat" and a few stakeholders said that consumers use the website "a lot". Some stakeholders thought the number of people using Nursing Home Compare was growing, and one stakeholder thought this was because people are generally trying to make more educated decisions about nursing home care. Another stakeholder thought this increase could also be a result of people using the Internet to look things up more frequently, nursing homes included. Some stakeholders noted that use of Nursing Home Compare probably differs depending on whether the patient is searching for care in an urban or a rural setting. Specifically, they stated that they think Nursing Home Compare is used more frequently in urban areas, where more nursing home options are available, compared to rural areas where there may be only one home in a town. See Table 3 below for summary of stakeholder responses. Some stakeholders stated that they believe the extent to which consumers use Nursing Home Compare may depend on the amount of time that the consumer has to research and pick a nursing home. For example, according to a few stakeholders, if someone's family member is getting discharged from the hospital and needs to be placed in a nursing home immediately, the consumer is less likely to use Nursing Home Compare. In contrast, one stakeholder noted that if consumers are planning for the future and researching nursing homes before care is needed, then they are more likely to use Nursing Home Compare. We found that stakeholders were split in their responses about when consumers would typically use Nursing Home Compare - whether as an initial step in beginning their nursing home search or as a way to confirm recommendations obtained from others. Most stakeholders stated that the consumer using the website is most likely a family member--usually an adult child or grandchild--and rarely the individual in need of a nursing home placement. When asked how valuable the information provided on Nursing Home Compare is to consumers who are researching and choosing a nursing home, most stakeholders stated that it was "somewhat valuable", and some said that they thought it was "very valuable". One stakeholder said that the information was "of little value". See Table 4 below for a summary of stakeholder responses. Some stakeholders stated that the information on Nursing Home Compare is a good place to start and may help consumers narrow down their search, but ultimately it is not likely to be the only source of information. Many stakeholders agreed that in addition to conducting online research, consumers should also always try to visit nursing homes in person before a making a decision. A few stakeholders stated that observing a nursing home and its current residents firsthand on any given day provides the most valuable information when making a decision. In addition, stakeholders noted that consumers also obtain information about nursing homes through other sources--primarily through word of mouth from friends, family, and neighbors, and from information provided by primary care physicians, hospital discharge planners, and local ombudsmen. Many stakeholders noted that in most cases though, the location of a nursing home is often the main determinant of where a family member is placed. Stakeholders mentioned that consumers also use third party, private websites, and in some states, such as California and Kansas, consumers may rely on websites with state-specific nursing home information. Some stakeholders thought that consumers used these other sources of information more often than Nursing Home Compare. A couple of stakeholders thought consumers preferred these third-party, private websites because some of them provide a more personalized experience and offer the opportunity to speak with someone on the phone, where CMS's Nursing Home Compare does not provide either of those options. A couple other stakeholders thought that consumers may be more likely to use and trust Nursing Home Compare compared to these other private websites simply because it is a government website. A couple of stakeholders expressed concern about consumers using third-party, private websites because nursing homes may pay to be included, and so the website may not provide objective information on nursing home options for consumers. Additionally, these private websites often appear on search engine results before Nursing Home Compare, so consumers may use them before seeing and using CMS's Nursing Home Compare website. Finally, stakeholders provided mixed responses regarding whether they suggested consumers use Nursing Home Compare when helping them search for nursing homes. For example, several stakeholders told us that they routinely referred consumers to the website, while another said that she would only direct consumers to Nursing Home Compare if they were not familiar with the area, or if did not have any time to spend on the nursing home search process. The stakeholder would ultimately recommend the consumer coming in and talking to her, and then would not use Nursing Home Compare at all. In addition to the contact name above, Linda Kohn, Director, Karin Wallestad, Assistant Director, Kathryn Richter, Analyst-In-Charge, Amy Andresen, Julianne Flowers, Shannon Smith, and Brienne Tierney made key contributions to this report. Also contributing were Jacques Arsenault, Wesley Dunn, Krister Friday, Rich Lipinski, Dae Park, Vikki Porter, and Steven Putansu.

Approximately 15,600 nursing homes participating in the Medicare and Medicaid programs provide care to 1.4 million residents each year. To help consumers make informed choices about nursing homes, CMS developed the Nursing Home Compare website, and on the site made available the Five-Star System, which rates homes on quality components. GAO was asked to assess the website and rating system as tools for consumers. GAO examined (1) the information CMS collects about the use of Nursing Home Compare, including its usefulness to consumers, and potential areas, if any, to improve the website, and (2) the extent to which the Five-Star System enables consumers to understand nursing home quality and make distinctions between homes. GAO reviewed CMS documents and interviewed CMS officials and national and a non-generalizable sample of state-level stakeholders from four states, selected on factors such as size. GAO also analyzed Five-Star System and consumer complaint data, and analyzed resident satisfaction data from two of the four selected states. GAO found that the Centers for Medicare & Medicaid Services (CMS) collects information on the use of the Nursing Home Compare website, which was developed with the goal of assisting consumers in finding and comparing nursing home quality information. CMS uses three standard mechanisms for collecting website information--website analytics, website user surveys, and website usability tests. These mechanisms have helped identify potential improvements to the website, such as adding information explaining how to use the website. However, GAO found that CMS does not have a systematic process for prioritizing and implementing these potential improvements. Rather, CMS officials described a fragmented approach to reviewing and implementing recommended website changes. Federal internal control standards require management to evaluate appropriate actions for improvement. Without having an established process to evaluate and prioritize implementation of improvements, CMS cannot ensure that it is fully meeting its goals for the website. GAO also found that several factors inhibit the ability of CMS's Five-Star Quality Rating System (Five-Star System) to help consumers understand nursing home quality and choose between high- and low- performing homes, which is CMS's primary goal for the system. For example, the ratings were not designed to compare nursing homes nationally, limiting the ability of the rating system to help consumers who live near state borders or have multistate options. In addition, the Five-Star System does not include consumer satisfaction survey information, leaving consumers to make nursing home decisions without this important information. As a result, CMS cannot ensure that the Five-Star System fully meets its primary goal. GAO is making four recommendations, including, that CMS establish a process to evaluate and prioritize website improvements, add information to the Five-Star System that allows homes to be compared nationally, and evaluate the feasibility of adding consumer satisfaction data. HHS agreed with three of GAO's recommendations, but did not agree to add national comparison information. GAO maintains this is important information, as discussed in the report.

Response to Recommendations Based on information provided by USAID and USDA and our own analysis, we determined that recommendation 1 has not been implemented. Although the Interagency Policy Committee has met regularly to develop a governmentwide food security strategy, the group has yet to publish its strategy. However, the Interagency Policy Committee has established an objective to help rural farmers feed themselves and to help countries establish sustainable agriculture systems by (1) investing in country-led food security plans, (2) coordinating stakeholders strategically, (3) supporting multilateral mechanisms, (4) ensuring a sustained commitment, and (5) focusing on a comprehensive approach to agriculture productivity. The Interagency Policy Committee has also identified seven principles for its food security strategy, including the following: stimulate postharvest and private sector growth, support women and families, maintain the natural resource base, expand knowledge and training, increase trade flows, and support an enabling policy environment. Based on information provided by USAID and USDA and our own analysis, we determined that recommendation 2 has not been implemented. USAID officials stated that they plan to update Congress on progress toward implementation of a governmentwide food security strategy as part of the agency's 2008 Initiative to End Hunger in Africa report; the full version of this report was not publicly available as of September 2009. A summary report provided by USAID identifies three food security pillars--(1) immediate humanitarian response, (2) urgent measures to address causes of the food crisis, and (3) related international policies and opportunities--used to respond to the 2007 and 2008 global food crisis. However, the governmentwide strategy has not yet been finalized, and it is premature to report on its implementation. Oversight Questions 1. What coordination and integration mechanisms has the U.S. government established to enhance the efficiency and effectiveness of U.S. international food assistance? 2. What is the nature and scope of current U.S. global food security activities? What agencies, programs, and funding levels are involved? How are NGOs, international organizations, foreign governments, and host governments involved in these efforts? 3. What progress have U.S. agencies made in developing an integrated governmentwide global food security strategy? What are the goals and timeframe for the implementation of the strategy? 4. What key criteria has the U.S. government developed to assess the implementation of the global food security strategy? Does the U.S. government plan to report annually to Congress on the results of the strategy?

The number of individuals experiencing hunger has grown to more than 1 billion worldwide in 2009, up from a record 963 million in 2008, according to the United Nations (UN) Food and Agriculture Organization (FAO). FAO attributes this upsurge in hunger to the global economic crisis, which followed rising food and fuel prices from 2006 to 2008. However, even before these crises, the number of undernourished people had been increasing annually in sub-Saharan Africa--where some of the world's food needs are greatest--underscoring the need to improve international food assistance. International food assistance includes both emergency food aid and long-term food security programs. Due to rising food prices, increasing conflicts, poverty, and natural disasters, in 2007, a record 47 countries--27 located in Africa--faced food crises requiring emergency assistance, according to FAO. To address these emergencies, countries provide food aid as part of a humanitarian response to address acute hunger through either in-kind donations of food or cash donations. In-kind food aid is food procured and delivered to vulnerable populations, while cash donations are given to implementing organizations, such as the UN World Food Program (WFP), to procure food in local and regional markets, also referred to as local and regional procurement (LRP). International food assistance also includes a development-focused response to address long-term chronic hunger through food security programs. While food aid has helped to address the immediate nutritional requirements of some vulnerable people in the short term, it has not addressed the underlying causes of persistent food insecurity. Our objectives were to (1) update U.S. agencies' responses to GAO's previous international food assistance recommendations and (2) identify potential oversight questions for congressional consideration. Since 1996, we have published 18 products that provided insight, many with recommendations, on international food assistance. Specifically, in the past 3 years, we issued four reports with 16 recommendations to improve the efficiency of U.S. food aid and food security programs. Over the course of our work, we also identified improvements that were needed, as well as obstacles that affect the success of program planning and implementation. As a result, we have identified five issues for Congressional consideration to ensure more efficient and effective international food assistance: (1) coordination and integration, (2) needs assessments and market information, (3) transportation and logistics, (4) nutrition and food quality control, and (5) monitoring and evaluation.

Enacted on March 23, 2010, PPACA involves major health care stakeholders, including federal and state governments, employers, insurers, and health care providers, in an attempt to reform the private insurance market and expand health coverage to the uninsured. IRS is one of several agencies accountable for implementing the legislation and has responsibilities pertaining to 47 PPACA provisions. Some provisions took effect immediately or retroactively while others are to take effect as late as 2018. According to IRS officials, the most challenging of these provisions relate to the health care exchanges to be established by states by 2014. These exchanges are marketplaces for individuals and certain types of employers to purchase health insurance. To support the exchanges, IRS must modify existing or design new IT systems that are capable of transmitting data to and from HHS, help HHS craft eligibility determinations and related definitions, and engage in new interagency coordination, such as with HHS and the Department of Labor. To coordinate agency-wide efforts, a PPACA Executive Steering Committee (ESC) oversees two Program Management Offices (PMOs) that coordinate with Health Care Counsel--which is part of IRS's Office of Chief Counsel (Counsel)--on the implementation. The Services and Enforcement (S&E) PMO oversees the work completed within IRS's existing business operating divisions (BOD) as well as the efforts of four workstream teams. The Modernization, Information Technology and Security Services (MITS) PMO leads IT development for the program. The Health Care Counsel provides legal counsel and guidance (see fig. 1). Management of the implementation teams is expected to shift from the program management office to the business operating divisions, MITS, and Counsel as the program is fully implemented. The program management offices and business operating divisions, along with overall IRS leadership, coordinate with IRS's Office of the Chief Financial Officer (CFO) to allocate resources for implementation efforts. Implementation costs are expected to reach $881 million through fiscal year 2013, with $521 million of that amount being provided through HHS's Health Insurance Reform Implementation Fund (HIRIF), a fund to which Congress appropriated $1 billion for federal spending to implement PPACA, and the remainder from IRS's 2013 budget request. Table 1 shows IRS's PPACA budget and HIRIF funding amounts. IRS's risk management efforts are crucial in implementing a program of this size. By evaluating the probability and impact of a given risk's occurrence, risk management encourages planning for ways to lessen the probability or minimize the impact. Much of the remaining implementation work is new to IRS, such as that related to health care exchanges. IRS is more likely to succeed with steps in place to identify and address risks before they occur and make contingency plans for events that cannot be controlled. Though not a guarantee, IRS's planning for these tasks make successful implementation more likely. Over half of the 47 provisions requiring action from IRS were statutorily effective in or prior to 2010, forcing IRS to conduct short-term implementations and long-term strategic planning simultaneously. With many short-term projects now completed, IRS has been focusing on its long-term planning since our 2011 report, and has made varying degrees of progress in implementing our four recommendations. These efforts have helped IRS gain a better understanding and vision for the implementation work and challenges remaining and how IRS would manage risks to the program's success. IRS has implemented one of our four recommendations from June 2011 to strengthen PPACA implementation efforts by documenting a schedule for developing performance measures for PPACA that are to link to program goals (see table 2). IRS made some progress on the remaining three recommendations from our June 2011 report. Absent more progress, IRS may encounter challenges in overseeing the program if activities in project plans are not linked, cost estimates are not current, and risk mitigation strategies are not properly assessed and decisions documented. We recommended that IRS develop one set of goals and an integrated project plan across IRS to clarify the vision and mitigate the risk that lower level units may work at cross purposes. The program's governance document now stipulates program goals that align with IRS's mission. IRS continues to maintain separate project plans for S&E and MITS activities, though it has an additional plan that offers a high level overview of the major PPACA efforts and the related implementation progress across IRS. IRS officials said that the overview provides a sufficient perspective to assess overall progress, but we found it did not align with criteria for leading practices because it is updated manually, leaving it subject to error if those updating the plan are not acting in a timely manner or overlook a change in delivery schedules (see table 3). We recommended that IRS adopt the leading practices outlined in the GAO Cost Guide and shown in table 4 to enhance the reliability of its cost estimate for PPACA. However, little progress has been made as IRS's cost estimate is largely unchanged since it was developed in 2010. IRS's Estimating Program Office (EPO) plans to revise the cost estimate this year after reaching a milestone that clarified some business requirements related to IT development. In April 2012, IRS awarded a contract for an independent cost estimate that is slated to include the steps outlined in GAO's Cost Guide. Our June 2012 report on IRS's fiscal year 2013 budget recommended that IRS revise its PPACA cost estimate by September 2012, which IRS agreed to do. If IRS's EPO completes an estimate and it is compared to an independent estimate, IRS will make significant progress in implementing our recommendation. We recommended that IRS's plan assure that strategic-level risks are identified and that alternative mitigation strategies for risks are evaluated. Our conclusion was based on a comparison between IRS's risk plan from May 18, 2011, and the criteria outlined in GAO's risk management framework, shown in figure 2. Of the five stages of the risk management framework, IRS's risk plan did not meet the criteria associated with three stages: risk assessment, alternative evaluation, and management selection (see table 5). Strategic- level risks are now better addressed because the revised plan calls for involvement of higher level executives, but the plan does not specify policies and procedures involved in evaluating and selecting potential risk mitigation strategies. We discuss this topic further in the next section on IRS's revised risk management plan. Our assessment of IRS's revised risk management plan from February 24, 2012, indicated that IRS adheres to the criteria for three of the five stages of our framework for risk management. However, the plan's guidance on evaluating risk mitigation alternatives is not specific or comprehensive, nor does the plan address procedures for management in selecting strategies and documenting decisions made. Figure 3 summarizes our assessment of the IRS revised plan by comparing it to the five stages (see app. II for the full text included in fig. 3). As figure 3 indicates, the risk plan's discussion of evaluating potential risk mitigations is brief, with some processes and responsibilities left undefined. The plan did not provide specific guidance on the process for doing an evaluation, stating only that alternative strategies should be evaluated according to cost, level of effort, and return on investment. For example, the plan did not identify who is responsible for doing or reviewing the evaluation. Further, the plan did not provide guidance on selecting mitigation strategies, including verifying that resources are available for selected strategies. IRS officials acknowledged that the plan did not include these processes and responsibilities but said that they believe that teams considered such factors when making decisions. Additionally, the plan did not provide guidance on documenting the rationale(s) for selecting one alternative over others. As a result, IRS is less likely to have a trail of analysis that explains the decisions to those who work on PPACA projects in the future. Such a trail is important, as PPACA implementation involves many people managing many tasks over a number of years and across multiple offices. In the years ahead, implementation responsibility will shift from the PMOs to staff in the BODs who may not have been involved in these decisions about the mitigations considered and chosen and may have to develop a new mitigation if the original does not work. IRS officials noted that spending resources to do a thorough evaluation and to document the rationale for decisions may not be practical for risks that have a low probability of occurring or that IRS cannot control, such as a lack of funding. While this may be true, IRS's risk plan does not offer guidance on factors like the probability of a risk's occurrence that could affect the level of evaluation and amount of documentation to be done. Without specific guidance on evaluating potential mitigation strategies, the likelihood decreases that teams will conduct a thorough evaluation or have a consistent basis for deciding not to do so. Our analysis indicated that IRS generally implemented its risk management plan consistently for seven of the nine provisions in our sample. These seven provisions covered responsibilities such as for premium assistance tax credits for eligible individuals purchasing health insurance coverage through state exchanges, penalties on individuals who do not have minimum essential coverage, penalties on larger employers who do not offer coverage as required, and other taxes, credits, and fees. IRS did not follow its risk management plan for two sample provisions that IRS believed primarily required legal guidance and that IRS assigned primary responsibility for implementing to Counsel. In reviewing the seven sample provisions that were expected to have relatively high dollar impacts and greater risks, we asked for evidence that IRS completed the steps prescribed by its risk plan. summarizes the steps and results we found in IRS's implementation of the plan for the seven provisions (see app. III for detail on the sample provisions and our assessment of whether the sample provisions followed the four stages of IRS's risk plan). Our analyses focused on whether rather than how well IRS completed the required steps. Key steps included in the stage Brainstorming sessions with relevant stakeholders; guidance from Counsel; complete and document approval of Provision Assessment Form; record identified risks in tracking software, using information from Provision Assessment Form. Results found in implementation IRS provided evidence of taking these steps. Monitor risks weekly. IRS provided evidence of a weekly review meeting for risks. Determine risk levels for each recorded risk; evaluate and select risk mitigation strategies; assign risk ownership; establish performance thresholds that offer early warning that chosen mitigation strategies do not work. Risk levels were determined; risk ownership was assigned; little evidence of mitigation strategy evaluation; provisions with earlier effective dates were more likely to have established early warning indicators. Regularly scheduled reports reviewed at meetings by IRS management committees. IRS provided evidence of taking these steps. IRS consistently completed all steps outlined in the plan's Identification, Tracking, and Reporting stages. While some steps called for in the Resolution/Mitigation stage were consistently completed, we did not find an analysis of alternative risk mitigation strategies for several provisions in our sample. This inconsistency could stem from the lack of guidance, as previously discussed, on how to do mitigation evaluations, including documenting why a mitigation strategy is selected over the alternatives considered. As for the two sample provisions that Counsel was responsible for implementing, the risk management plan was not used. When asked about efforts to identify risks for one of the provisions, a Counsel official said that this responsibility rested with the BODs who ultimately would implement the provision. However, the S&E PMO overseeing the work in the BODs told us that Counsel was responsible for the provision's implementation, including managing the related risks. As a result of confusion as to who should take the lead in identifying and mitigating risks for provisions in which Counsel had lead responsibility, risks may not be identified and mitigated. IRS officials acknowledged that the risk plan was not used for these provisions, noting that the provisions were not expected to have an impact on IRS operations. However, one of the two provisions, an imposition of penalties for underpayments attributable to transactions lacking economic substance, had an operational impact in areas such as tax forms, customer service, and compliance checks, indicating that the risk plan should have been used. Looking more broadly beyond the provisions in our sample, we found that IRS generally implemented its risk management plan in four crosscutting areas: (1) resource allocation, (2) collaboration with other agencies, (3) decisions to extend deadlines or provide transitional relief, and (4) challenges related to addressing compliance and burden. However, IRS did not have a formal system for managing risks when coordinating with HHS. While we noted in Table 3 that most activities in project plans were not assigned specific resources, IRS's risk plan does facilitate knowledge sharing among the entities involved in allocating resources to the program, with the exception previously stated that it does not provide guidance on verifying that resources are available for selected mitigation strategies. The CFO, along with IRS management, allocates IRS's appropriation to IRS teams doing the implementation work. By involving the CFO in reviewing identified risks, the risk plan ensures that the CFO is aware of any risks related to the availability of resources. Regularly scheduled meetings between the CFO and PPACA implementation leadership also serve to facilitate discussion of the risks related to resource allocation. To the extent that IRS provides more specific guidance in the risk plan on verifying resources and updates its cost estimate for PPACA implementation, IRS will enhance its ability to manage risks related to allocating resources in an efficient manner. IRS and HHS developed an informal process for regular communication on project management, consisting of meetings several times per week to monitor progress on deliverables and solicit needed input on IRS activities that affect other agencies. IRS officials expressed confidence that the informal system of coordination worked effectively. The agencies also jointly established more formal guiding principles for their implementation efforts in 2010 to clarify goals and objectives. Although IRS and HHS regularly coordinated, we did not find a formal system for managing risks threatening the agencies' success in achieving their goals. Without a joint tracking system for risks related to the agencies' coordinated efforts, the agencies may duplicate efforts. They could also focus on tracking implementation deadlines while losing sight of risks that pose obstacles to meeting those deadlines. We found consistent evidence IRS had taken steps to identify potential compliance challenges. IRS used its Research, Analysis, and Statistics (RAS) organization to help project the volume of tax returns that would be subject to PPACA and help identify the likely population requiring outreach and education. When historical data for similar provisions were available, IRS attempted to use the data to construct a baseline of anticipated results. Counsel solicited formal comments from stakeholders and taxpayers in response to preliminary guidance. IRS made limited use of other means, such as focus groups, to gain insight into compliance and burden challenges facing the public. IRS officials said that they received informal feedback from conversations with other tax stakeholders, such as groups representing taxpayers, tax software developers, and tax preparers. We also saw evidence, such as with tax credits for small employers offering health insurance, that IRS enforcement staff attempted to account for known or suspected compliance risks. The risk plan calls for early warning thresholds that indicate that results are below expectations and we saw evidence that such thresholds are used regularly. Since our 2011 report, IRS has gained a better understanding of the work and challenges it faces in implementing PPACA. IRS has made varying degrees of progress in implementing our recommendations from 2011. As IRS continues to implement them, IRS leadership will enhance its line of sight over its progress and the challenges that remain. With expected implementation costs approaching $1 billion as IRS gets closer to major milestones in 2014, careful consideration of risks and alternatives for mitigating those risks is crucial in meeting deadlines and making the best use of taxpayer dollars. While IRS developed a risk management plan for PPACA implementation that meets several leading practices, IRS did not take any actions to implement our 2011 recommendation on assessing mitigation strategies. Further, IRS could take specific steps such as providing additional guidance on how to evaluate potential mitigation strategies and document the rationales for decisions made. Without additional guidance, IRS staff selecting mitigation strategies may not fully evaluate all alternatives or verify that resources are available for the strategy chosen. Not knowing the rationale behind selecting a mitigation strategy over others could hinder future decisions if the original strategy did not work and the original decision makers are no longer involved. While IRS's PPACA implementation teams generally followed the steps of the risk management plan in identifying and mitigating risks, the plan was not followed when Counsel led pieces of the implementation. If the plan is not followed, risks may not be addressed. Additionally, without a shared system for tracking and monitoring risks with partner agencies, such as HHS, the agencies will be more likely to overlook potential challenges or duplicate efforts to mitigate risks. To strengthen the PPACA risk management plan, we recommend that the Commissioner of Internal Revenue enhance guidance on evaluating risk mitigation alternatives to clarify who is responsible for doing the evaluation and making decisions based on the results as well as how they might do the evaluation, assure that resources are available for the chosen mitigation strategy, document the mitigation alternatives considered and rationale(s) for the decisions made. To ensure more consistent implementation of the risk management plan, we recommend that the Commissioner of Internal Revenue take the following two actions: ensure that the PPACA risk management plan is applied to provisions in which the Office of Chief Counsel assumes lead responsibility for implementation, and develop agreements with HHS (and other external parties as needed) on a system to record and track details on decisions made or to be made to ensure that risks are identified and mitigated. In a June 1, 2012, letter responding to a draft of this report (which is reprinted in app. IV), the IRS Deputy Commissioner for Services and Enforcement provided comments on our findings and recommendations as well as information on IRS efforts and progress to date on its PPACA implementation. IRS agreed with our first recommendation to enhance guidance in its PPACA risk management plan related to evaluating risk mitigation alternatives. Specifically, IRS agreed to revise its plan to (1) clarify responsibilities for doing the evaluation and making related decisions, (2) assure that resources are available for the mitigation strategy chosen, and (3) document the alternatives considered and the rationale(s) for decisions made. IRS also agreed with our two recommendations to ensure more consistent application of its risk management plan. First, IRS agreed to revise its plan to address the use of the plan for provisions being led by the Office of Chief Counsel. Second, IRS agreed to consult with HHS on the best approach to document and track decisions, risks, or both that affect both agencies. In that this recommendation referenced HHS specifically and possibly other external parties in identifying and mitigating these "joint" risks, we encourage IRS to take similar coordinated steps, as needed, when risks arise that affect IRS and these other parties. We are sending copies of this report to appropriate congressional committees, the Commissioner of Internal Revenue, the Secretary of the Treasury, the Chairman of the IRS Oversight Board, 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 staffs have any questions or wish to discuss the material in this report further, please contact me at (202) 512-9110 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 key contributions to this report are listed in appendix V. To assess IRS's progress in addressing our 2011 recommendations for improving PPACA implementation efforts, we compared IRS's planned and ongoing actions to leading practices described in our report. We analyzed IRS documentation and data, including program goals, project plans, cost estimates, risk management plans, governance plan, and presentations. We interviewed IRS officials and staff at IRS's National Office, including those in the Office of the Chief Financial Officer (CFO); Office of Chief Counsel; and Services & Enforcement (S&E) and Modernization and Information Technology Services (MITS) Program Management Offices (PMO) to clarify our understanding of IRS's progress and plans for implementing our recommendations. To assess IRS's risk management plan for PPACA, we compared the contents of IRS's Risk Management Plan, governance plan, and high- level action plans to the criteria outlined by GAO's risk management approach. We met with officials from the S&E PMO to confirm our understanding of the policies and procedures included in IRS's risk management process. To evaluate how consistently IRS applies its risk management plan for PPACA implementation, we analyzed IRS activities across a sample of PPACA provisions to verify that IRS followed the steps included in its risk plan. To assemble our sample, we identified provisions with the greatest likelihood of adverse effects and potential for the most significant financial consequences if risks were not identified and mitigated. We limited the scope of our sample to the 23 provisions with anticipated revenue and expenditure impacts of over $1 billion over the first 10 years of the legislation, as scored by the Joint Committee of Taxation and Congressional Budget Office. We eliminated 14 provisions to arrive at the final sample of 9 provisions based on the following criteria (see app. III for the 9 provisions in the sample). For example, since we focused on IRS's use of its PPACA risk plan, which was initially drafted in 2011, we removed six provisions, including: Four provisions that were implemented prior to the existence of IRS's risk plan: Section 10909 related to an adoption tax credit, Section 1408 (HCERA) related to the exclusion of cellulosic biofuel from a tax credit, Section 9003 related to repealing a tax exclusion in health flexible spending arrangements, and Section 9004 related to a tax on distributions from certain health savings accounts. Two provisions for which implementation had not started: Section 9005 related to the limits on health flexible spending Section 9001 related to an excise tax on high-cost employer- provided health insurance plans. To target provisions with the greatest likelihood of adverse effects from a failure to mitigate risks, we removed another seven provisions, including: Three provisions because IRS had identified only low level risks for them: Section 9013 related to the medical expense deduction threshold, Section 1405 (HCERA) related to an excise tax on medical Section 9012 related to the elimination of an employer deduction for a retiree prescription drug subsidy. Four provisions for which only 1 risk had been identified: Section 1322 related to a tax exemption for start-up nonprofit Section 6301 related to a fee on health insurance plans, Section 10907 related to an excise tax on tanning salon services, Section 9010 related to an annual fee on health insurers. Finally, because of overlap in the remaining provisions that required very similar work for IRS, we removed a provision from Section 9015 related to an increase of the Hospital Insurance tax on wages over a specified threshold. We asked IRS to provide evidence of its risk management activity in four key areas. For three of these areas--resource allocation, coordination with external partners, and compliance and burden challenges--we also sought this documentation as part of our work on the nine provisions. We analyzed IRS's responses and documentation, including risk logs, to determine what gaps, if any, existed between the steps called for by the risk plan and the actions that IRS took. We interviewed IRS officials and staff responsible for PPACA implementation, including officials from the PMOs for S&E and MITS, Office of the Chief Counsel, and Office of the CFO, and officials from the Department of Health and Human Services in conducting this work. For the risks related to the fourth key area--deadline extensions and other transitional relief--we interviewed officials in the Office of Chief Counsel. We sought information on their approach to understand how Chief Counsel coordinates with implementation teams about risks as decisions are considered and made about the extensions and relief. We conducted this performance audit from August 2011 to June 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. To assess how IRS's revised risk plan meets the criteria for each of GAO's risk management framework stages, we compared the criteria for each stage of the framework to the steps included in each of the stages of IRS's risk management plan. Table 7 shows how IRS's risk management plan meets the criteria for the risk management framework. In evaluating IRS's responses to a sample of nine PPACA provisions, we found that IRS generally followed the plan to identify, track and report risks. As discussed in our report, exceptions were (1) IRS did not consistently evaluate potential risk mitigation strategies in the Resolution/Mitigation stage of its risk plan, and (2) the risk plan was not used when the Office of Chief Counsel led the implementation of provisions related to a reinsurance program for early retirees and the economic substance doctrine. Table 8 shows the results of our evaluation. In addition to the to the individual named above, Thomas Short, Assistant Director; Ben Atwater; Linda Baker; Amy Bowser; Dean Campbell; Jennifer Echard; Rebecca Gambler; Meredith Graves; Sairah Ijaz; Sherrice Kerns; Donna Miller; Patrick Murray; Sabine Paul; and Cynthia Saunders made key contributions to this report. IRS 2013 Budget: Continuing to Improve Information on Program Costs and Results Could Aid in Resource Decision Making. GAO-12-603. Washington, D.C.: June 8, 2012. Small Employer Health Tax Credit: Factors Contributing to Low Use and Complexity. GAO-12-549. Washington, D.C.: May 14, 2012. Patient Protection and Affordable Care Act: IRS Should Expand Its Strategic Approach to Implementation. GAO-11-719. Washington, D.C.: June 25, 2011. GAO Cost Estimating and Assessment Guide: Best Practices for Developing and Managing Capital Program Costs. GAO-09-3SP. Washington, D.C.: March 2, 2009. Risk Management: Further Refinements Needed to Assess Risks and Prioritize Protective Measures at Ports and Other Critical Infrastructure. GAO-06-91. Washington, D.C.: December 15, 2005.

PPACA is a significant effort for IRS, with expected costs of $881 million from fiscal years 2010 to 2013 and work planned through 2018. To implement PPACA, IRSmust work closely with partner agencies to develop information technology systems that can share data with other agencies. Additionally, IRS is responsible for providing guidance to taxpayers, employers, insurers, and others to ensure compliance with new tax aspects of the law. Furthermore, it will be important for IRS to have systems to consistently identify, assess, mitigate, and monitor potential risks to the program's success. As requested, this report (1) describes IRS's progress in addressing GAO recommendations from June 2011 on PPACA implementation, (2) assesses IRS's revised risk management plan, and (3) assesses how IRS applies its plan in practice. GAO compared IRS's revised risk plan to GAO's criteria for risk management and selected 9 provisions of the law in which IRS had a role to determine whether IRS used the risk plan consistently. Because selection focused on provisions that had the most risks and highest dollar impacts, the results are not generalizable but are relevant to how IRS managed risks. The Internal Revenue Service (IRS) has implemented one of GAO's four recommendations from June 2011 to strengthen the Patient Protection and Affordable Care Act (PPACA) implementation efforts by scheduling the development of performance measures for the PPACA program. IRS has made varying degrees of progress on the other three recommendations: develop program goals and an integrated project plan; develop a cost estimate consistent with GAO's published guidance; and assure that IRS's risk management plan identifies strategic level risks and evaluates associated mitigation options. IRS's revised risk management plan meets three of five criteria for risk management plans, but the plan does not have specific guidance for evaluating and selecting potential risk mitigation options, such as how to identify who conducts and reviews the analysis, determine the availability of resources for a given strategy, and document for future users the rationale behind decisions made. IRS applied its risk management plan when identifying, tracking, and reporting on implementation risks. Although the risk plan calls for risk mitigation strategies to be evaluated, these evaluations have not been done. IRS officials said that evaluating these strategies would require varying levels of effort because the probability and magnitude of risks differ. However, the plan was silent on this point; it provided no guidance as to when and to what extent an evaluation should be done. Without evaluating potential strategies, IRS may not consider critical factors that impact the program's success. IRS's risk management plan was not used when IRS's Office of Chief Counsel was responsible for implementing two provisions GAO reviewed. Although these provisions primarily required legal counsel and guidance, IRS officials said that one of the provisions also affected IRS operations and could have risks that need to be managed. Additionally, GAO did not find evidence that a risk plan was used to track and mitigate risks when coordinating with partner agencies, such as the Department of Health and Human Services. Without a system for tracking shared risks, IRS is more likely to overlook risks or duplicate efforts. GAO recommends that IRS (1) enhance its guidance on evaluating risk mitigation alternatives and documenting decisions, (2) use a risk management plan for work led by its Office of Chief Counsel, and (3) develop agreements with external parties to record and track risks that threaten shared goals and objectives. IRS officials agreed with all of GAO's recommendations.

USPS's financial condition and outlook continue to be challenging despite recent congressional action that relieved USPS of $4 billion in mandated payments to prefund postal retiree health benefits by September 30, 2009. Preliminary results from the end of fiscal year 2009 and USPS's outlook include: In fiscal year 2009, mail volume declined about 28 billion pieces, or about 14 percent, from the prior fiscal year, when volume was about 203 billion pieces; revenue declined from about $75 billion to about $68 billion. A looming cash shortfall necessitated last-minute congressional action to reduce USPS's mandated payments to prefund retiree health benefits from $5.4 billion to $1.4 billion. In the absence of this congressional action, USPS was on track to lose about $7 billion. USPS and its auditors are currently considering whether the $4 billion in relief will be booked in fiscal year 2009 or fiscal year 2010. Regardless of the outcome, USPS will have a large net loss for the third consecutive fiscal year and one of its largest losses in decades (see fig. 1). USPS debt at the end of fiscal year 2009 increased by the annual statutory limit of $3 billion, bringing outstanding debt to $10.2 billion. If debt continues to increase by $3 billion annually, USPS will reach its total statutory debt limit of $15 billion in fiscal year 2011. Looking forward, USPS has projected annual deficits exceeding $7 billion in fiscal years 2010 and 2011, and continuing large cash shortfalls. As we previously reported, USPS's cost-cutting efforts and rate increases have not fully offset the impact of huge declines in mail volume (a decline of about 28 billion pieces in fiscal year 2009) and other factors--notably semi-annual cost-of-living allowances (COLA) for employees covered by union contracts. Compensation and benefits constitute close to 80 percent of USPS costs--a percentage that has remained similar over the years despite major advances in technology and automating postal operations. These costs declined by 1.3 percent in the first 11 months of fiscal year 2009 (the most recent data available) as compared to the same time period in fiscal year 2008, in contrast to other costs such as transportation, supplies and services, and depreciation, which together declined 8.2 percent. Over this same period, total revenue declined by 8.6 percent, including declines of 9.1 percent for market-dominant products and about 4.0 percent for competitive products. (See app. I for a summary of market- dominant and competitive products.) About 88 percent of USPS revenue was generated from market-dominant products and services, with competitive products and services generating about 12 percent of rcent of revenues (see fig. 2). revenues (see fig. 2). PAEA and implementing Postal Regulatory Commission (PRC) regulations provided USPS with greater flexibility to set prices, test new postal products, and retain earnings so that it can finance needed capital investments and repay its debt. PAEA abolished the former ratemaking structure that involved a lengthy, costly, and litigious process. Under the new structure, USPS has broad latitude to announce rate changes that are implemented in a streamlined process unless PRC determines these rates would violate legal requirements. Key requirements and flexibilities provided in the law include: A price cap based on the Consumer Price Index generally applies to market-dominant classes of mail, such as First-Class Mail and Standard Mail. This means that in general, USPS has the flexibility to increase some individual rates either above or below the rate of inflation as long as the average rate increase for each class of mail does not exceed the cap. USPS can request that PRC approve a rate increase that exceeds the price cap on the basis of extraordinary or unexpected circumstances (postal stakeholders refer to this as an "exigent" rate increase). PRC must determine whether such an increase would be reasonable, equitable, and necessary "to maintain and continue developing postal services of the kind and quality adapted to the needs of the United States." Worksharing discounts for market-dominant products are generally limited to the costs avoided by USPS as a result of specified mailer activities. Each competitive product must generate sufficient revenues to cover its costs. In addition, competitive products must collectively cover what PRC determines to be an appropriate share of USPS's overhead costs. PRC has determined this share to be 5.5 percent of USPS's overhead costs. Within these constraints, USPS was given broad pricing flexibility for its competitive products, which are not subject to a price cap. USPS can also establish volume discounts for competitive products as well as enter into contract rates with individual mailers. PAEA generally restricted USPS to offering postal products and services by prohibiting it from initiating new nonpostal products and services. USPS was required to discontinue existing nonpostal products--such as passport photo services and photocopying services--except for those that PRC determined should be continued. Subsequently, PRC determined that most existing USPS nonpostal products should be continued. In the short time since PAEA was enacted, with the exception of annual rate increases, revenue-generation actions have generally achieved limited results compared to USPS's deficits. We commend USPS for taking action to use its pricing flexibility to address the pressing need for additional revenue. Although these actions generated some revenues, their positive impacts were overwhelmed by the recession--with its cutbacks in consumer spending and corporate advertising--and ongoing diversion of mail to electronic alternatives. Further, the potential of some actions was limited because they applied to types of mail that generate only a small fraction of USPS revenues. Other actions, such as targeted sales for some types of mail, were implemented this year with little advance notice, which may have limited mailer response. Key USPS revenue-generation actions since PAEA was enacted are summarized below. Rate Increases for Market-Dominant Mail: Under the ratemaking system established by PAEA, USPS annually increased rates in 2008 and 2009 for market-dominant classes of mail at virtually the maximum allowable amount under the price cap. To put this into context, historically, rate increases have been a key action that USPS has taken to remain financially viable. Volume-Based Incentives for Specific Types of Market-Dominant Mail: USPS has recently implemented three targeted rate incentives to stimulate additional mail volume and take advantage of its excess operational capacity. First, a 2009 "summer sale" for Standard Mail offered lower rates for volumes that exceeded specific thresholds, with the goal of increasing mail volume during a typically slow period. Second, an ongoing "fall sale" for First-Class Mail aimed at commercial mailers is providing lower rates for volume over specific thresholds. Third, an ongoing Saturation Mail incentive program also is providing lower rates for volume over specific thresholds. Negotiated Service Agreements (NSA) for Market-Dominant Products: According to USPS data, its seven NSAs for market-dominant products collectively did not generate any net revenue in fiscal years 2007 and 2008 combined. These NSAs generally offered mailers lower rates for volumes that exceeded specific thresholds. Mailers also agreed to actions to reduce some USPS costs, such as the substitution of electronic notices in lieu of USPS returning undeliverable advertising mail. Rate Changes and Contract Rates for Competitive Products: Under the ratemaking system established by PAEA, USPS annually increased rates in 2008 and 2009 for competitive products such as Priority Mail and Express Mail. USPS also made product and pricing changes to enhance their competitiveness, such as a new small flat-rate box for Priority Mail and the introduction of zone-based rates for Express Mail. USPS has introduced volume discounts for Express Mail, Priority Mail, and bulk Parcel Post. USPS has also introduced lower rates for electronic postage used for some competitive products such as Express Mail and Priority Mail. In addition, USPS has entered into close to 90 contracts with mailers of competitive products that included Priority Mail, Express Mail, bulk Parcel Post, Parcel Return Service, and various types of bulk international mail. These contracts are generally volume based and have provisions intended to lower USPS's mail handling costs. USPS does not publicly report results for its individual contracts because it considers this information to be proprietary. Looking forward, USPS has opportunities to continue pursuing the flexibilities provided by PAEA to help generate additional revenue from postal products and services. For example, USPS is continuing to pursue its "Click-N-Ship" initiative that allows customers to print out mailing labels with postage, as well as flexible pricing for Express Mail, Priority Mail, and bulk Parcel Post. USPS is also promoting voting by mail to stimulate additional First-Class Mail volume. However, results from USPS revenue-generation efforts will continue to be constrained by the economic climate and by changing use of the mail. USPS has asked Congress to change the restrictions established by PAEA so that it could offer new nonpostal products and services such as banking and insurance. However, USPS has not presented a business plan which details what markets it might enter, its prospects for profitability, and what specific legislative changes would be needed. Allowing USPS to compete more broadly with the private sector would raise risks and concerns. As with USPS's nonpostal ventures before PAEA was enacted, new nonpostal ventures could lose money; and even if they were to make money, issues related to unfair competition would need to be considered. On the other hand, increasing postal rates may provide a short-term revenue boost but would risk depressing mail volume and revenues in the long term, in part by accelerating diversion of payments, communications, and advertising to electronic alternatives. Recognizing this, the Postmaster General recently announced that there will not be an "exigent" price increase in 2010 for market-dominant products such as First-Class Mail and Standard Mail. He explained: "While increasing prices might have generated revenue for the Postal Service in the short term, the long-term effect could drive additional mail out of the system." Similarly, increasing rates for competitive products such as Express Mail and Priority Mail may provide a short-term revenue boost but risk long-term losses in mail volume, revenues, and USPS competitiveness. Further, the short-term impact of increasing competitive rates would likely be limited because competitive products and services generate about 12 percent of USPS revenue. USPS has not announced whether it will increase rates for competitive products in 2010. Whether USPS should be allowed to engage in nonpostal activities should be carefully considered, including its poor past performance in this area, as should the risks and fair competition issues. We have previously reported that: USPS lost nearly $85 million in fiscal years 1995, 1996, and 1997 on 19 new products, including electronic commerce services, electronic money transfers, and a remittance processing business, among others. In 2001, we reported that none of USPS's electronic commerce initiatives were profitable and that USPS's management of these initiatives--such as an electronic bill payment service that was eventually discontinued--was fragmented, with inconsistent implementation and incomplete financial information. We testified during the debate on postal reform on some longstanding questions about whether USPS should enter into nonpostal initiatives and the appropriate role of a federal entity competing with private firms, particularly since USPS has a statutory monopoly on letter mail and other disparities in legal status vis-a-vis its potential competitors, such as exemptions from taxes. Questions include: Should USPS be allowed to compete in areas where there are already private-sector providers, and if so, on what terms? What laws should be applied equally to USPS and its competitors, such as anti-trust and consumer protection laws? What transparency and accountability mechanisms would be needed for any new nonpostal products and services to prevent unfair competition and inappropriate cross-subsidization from postal products and services? Should USPS be subject to the same regulatory entities and regulations as its competitors if it could compete in banking, insurance, and retail services? Would the PRC have an oversight role for any new nonpostal activities? If USPS used existing retail presence of 37,000 facilities to offer new nonpostal products and services--such as leasing or subleasing excess capacity in its facilities--would this be an unfair competitive advantage? How would USPS finance its nonpostal activities, considering its difficult financial condition? Would USPS be allowed to borrow at Treasury rates more favorable than those available to other businesses? In conclusion, when we recently added USPS's financial condition to our high-risk list, we stated that USPS urgently needs to restructure to achieve short-term and long-term financial viability. USPS has not been able to cut costs fast enough or generate sufficient revenue to offset the accelerated decline in mail volume and revenue. USPS restructuring will require aligning its costs with revenues, generating sufficient earnings to finance capital investment, and managing its debt. Although USPS has taken some action to use its pricing and product flexibility under PAEA, results to date have been limited and will be constrained by the economic climate and changing use of the mail. Mail volume has typically returned after past recessions, but much of the recent volume decline may not return. Nevertheless, USPS has opportunities to generate new revenues from postal products and services that appear more promising than venturing into new risky nonpostal areas, while also making significant reductions in its workforce and network costs. Mr. Chairman, this concludes 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 statement, please contact Phillip Herr at (202) 512-2834 or [email protected]. Individuals who made key contributions to this statement include Shirley Abel, Teresa Anderson, Gerald P. Barnes, Colin Fallon, Kenneth E. John, Hannah Laufe, Daniel Paepke, and Crystal Wesco. Domestic and international single-piece mail (e.g., bill payments and letters) and domestic bulk mail (e.g., bills and advertising) Mainly bulk advertising and direct mail solicitations Mainly magazines and local newspapers Single-piece Parcel Post (e.g., packages and thick envelopes with gifts and merchandise) Media Mail (e.g., books, CDs, and DVDs) Library mail (e.g., items on loan from or mailed between academic institutions, public libraries, and museums) Bound printed matter (e.g., permanently-bound sheets of advertising, or directories such as catalogs and phone books) A variety of services, such as Delivery receipt services (e.g., Delivery Confirmation, Signature Confirmation) Certified Mail and Registered Mail Address list services (e.g., services to update and correct business mailing lists) Caller service (business mail pickup at a USPS facility) Guaranteed overnight delivery to most locations for time-sensitive letters, documents or merchandise 2-3 day service to most domestic locations that is often used to expedite delivery Bulk Parcel Post parcel mailings entered at USPS facilities that are generally close to the destination of the mail Expedited delivery of items to foreign countries, with guaranteed date-certain service to some locations Delivery of items to foreign countries that generally has faster service standards than International First-Class Mail Bulk mailings sent to other countries (e.g., bills, statements, advertising, and magazines) Business retrieval of returned parcels from USPS facilities A variety of services, such as Premium Forwarding Service (reshipping mail from a primary residential address and some P.O boxes to a temporary address using Priority Mail) International delivery receipt services, such as Registered Mail, return receipt, and restricted delivery 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 U.S. Postal Service's (USPS) financial condition and outlook deteriorated significantly during fiscal year 2009. USPS was not able to cut costs fast enough to offset declining mail volume and revenues resulting from the economic downturn and changing mail use. Facing an unprecedented cash shortfall, USPS stated that it would have insufficient cash on hand to make its mandated $5.4 billion payment to prefund postal retiree health benefits that was due by the end of the fiscal year. In July, 2009, GAO added USPS's financial condition to the list of high-risk areas needing attention by Congress and the executive branch to achieve broad-based transformation. GAO stated that USPS urgently needs to restructure to address its current and long-term financial viability. GAO also stated that USPS needs to use its flexibility to generate revenue through new or enhanced products. This testimony will (1) update USPS's financial condition and outlook, (2) describe changes made by the Postal Accountability and Enhancement Act (PAEA) of 2006 that provided USPS with greater flexibility to generate revenues, (3) outline USPS's revenue-generation actions and results using this flexibility, and (4) discuss options for USPS to generate increased revenues in the future. This testimony is based on GAO's past and ongoing work. USPS's financial condition for fiscal year 2009 and its financial outlook continue to be challenging: (1) In fiscal year 2009, mail volume declined about 28 billion pieces, or about 14 percent, from the prior fiscal year, when volume was about 203 billion pieces; revenue declined from about $75 billion to about $68 billion. (2) A looming cash shortfall necessitated last-minute congressional action to reduce USPS's mandated payments to prefund retiree health benefits by $4 billion. In the absence of congressional action, USPS was on track to lose about $7 billion. (3) USPS debt increased at the end of fiscal year 2009 by the annual statutory limit of $3 billion, bringing outstanding debt to $10.2 billion. At this rate, USPS will reach its total $15 billion statutory debt limit in fiscal year 2011. (4) USPS projects annual deficits over $7 billion in fiscal years 2010 and 2011, and continuing large cash shortfalls. PAEA and implementing regulations gave USPS more flexibility to set prices, test new postal products, and retain earnings. USPS has broad latitude to set rates that take effect unless the Postal Regulatory Commission finds the rates would violate legal requirements, such as a price cap that generally limits rate increases for most mail to the rate of inflation. Except for annual rate increases, USPS revenue-generation actions since PAEA was enacted have generally achieved limited results compared to USPS's deficits. To its credit, USPS has taken actions to use its pricing flexibility to address the pressing need for additional revenue. These actions generated some revenues, although their positive impacts were overwhelmed by the recession--with its cutbacks in consumer spending and corporate advertising--and ongoing diversion of mail to electronic alternatives. Looking forward, USPS has opportunities to continue pursuing the flexibilities provided by PAEA to help generate additional revenue from postal products and services. However, results will continue to be constrained by the economic climate and by changing use of the mail. Mail volume has typically returned after past recessions, but much of the recent volume decline may not return. Increasing postal rates may provide a short-term revenue boost but would risk depressing mail volume and revenues in the long-term, in part by accelerating diversion of mail to electronic alternatives. USPS has asked Congress to change the restrictions established by PAEA so that it could offer new nonpostal products and services such as banking and insurance. Allowing USPS to compete more broadly with the private sector could lose money, and fair competition issues would need to be considered. Thus, in addition to its revenue-generation initiatives, USPS will need to continue making significant reductions in its workforce and network costs. When we recently added USPS's financial condition to our high-risk list, we said that restructuring will require USPS to align its costs with revenues, generate sufficient earnings to finance capital investment, and manage its debt.

NRC's implementation of a risk-informed, performance-based regulatory approach for commercial nuclear power plants is complex and will require many years to fully implement. It requires basic changes to the regulations and NRC's processes to ensure the safe operation of these plants. NRC faces a number of challenges to develop and to implement this process. For example, because of the complexity of this change, the agency needs a strategy to guide its development and implementation. We recommended such a strategy in March 1999. We suggested that a clearly defined strategy would help guide the regulatory transformation if it described the regulatory activities NRC planned to change to a risk-informed approach, the actions needed to accomplish this transformation, and the schedule and resources needed to make these changes. NRC initially agreed that it needed a comprehensive strategy, but it has not developed one. As one NRC Commissioner said in March 2000, "we really are . . . inventing this as we go along given how much things are changing, it's very hard to plan even 4 months from now, let alone years from now." NRC did develop the Risk-Informed Regulation Implementation Plan, which includes guidelines to identify, set priorities for, and implement risk-informed changes to regulatory processes. The plan also identifies specific tasks and projected milestones. The Risk-Informed Regulation Implementation Plan is not as comprehensive as it needs to be, because it does not identify performance measures, the items that are critical to achieving its objectives, activities that cut across its major offices, resources, or the relationships among the more than 40 separate activities (25 of which pertain to nuclear plants). For example, risk-informing NRC's regulations will be a formidable task because they are interrelated. Amending one regulation can potentially affect other regulations governing other aspects of nuclear plant operations. NRC found this to be the case when it identified over 20 regulations that would need to be made consistent as it developed a risk- informed approach for one regulation. NRC expects that its efforts to change its regulations applicable to nuclear power plants to focus more on relative risk will take 5 to 8 years. NRC has compounded the complexity of moving to a new regulatory approach by deciding that compliance with such an approach will be voluntary. As a result, NRC will be regulating with two different systems-- one for those utilities that choose to comply with a risk-informed approach and another for those that choose to stay with the existing regulatory approach. It is not clear how this dual system will be implemented. One part of the new risk-informed approach that has been implemented is a new safety oversight process for nuclear power plants. It was implemented in April 2000; and since then, NRC's challenge has been to demonstrate that the new approach meets its goal of maintaining the same level of safety as the old approach, while being more predictable and consistent. The nuclear industry, states, public interest groups, and NRC staff have raised questions about various aspects of the process. For example, the industry has expressed concern about some of the performance indicators selected. Some NRC staff are concerned that that the process does not track all inspections issues and NRC will not have the information available, should the public later demand accountability from the agency. Furthermore, it is very difficult under the new process to assess those activities that cut across all aspects of plant operations-- problem identification and resolution, human performance, and safety conscious work environment. In June 2001, NRC staff expect to report to the Commission on the first year of implementation of the new process and recommend changes, where warranted. NRC is facing a number of difficulties inherent in applying a risk-informed regulatory approach for nuclear material licensees. The sheer number of licensees--almost 21,000--and the diversity of the activities they conduct--converting uranium, decommissioning nuclear plants, transporting radioactive materials, and using radioactive material for industrial, medical, or academic purposes--increase the complexity of developing a risk-informed approach that would adequately cover all types of licensees. For example, the diversity of licensees results in varying levels of analytical sophistication; different experience in using risk- informed methods, such as risk assessments and other methods; and uneven knowledge about the analytical methods that would be useful to them. Because material licensees will be using different risk-informed methods, NRC has grouped them by the type of material used and the regulatory requirements for that material. For example, licensees that manufacture casks to store spent reactor fuel could be required to use formal analytical methods, such as a risk assessment. Other licensees, such as those that use nuclear material in industrial and medical applications, would not be expected to conduct risk assessments. In these cases, NRC staff said that they would use other methods to determine those aspects of the licensees' operations that have significant risk, using an approach that considers the hazards (type, form, and quantity of material) and the barriers or physical and administrative controls that prevent or reduce exposure to these hazards. Another challenge associated with applying a risk-informed approach to material licensees is how NRC will implement a new risk-informed safety and safeguards oversight process for fuel cycle facilities. Unlike commercial nuclear power plants, which have a number of design similarities, most of the 10 facilities that prepare fuel for nuclear reactors perform separate and unique functions. For example, one facility converts uranium to a gas for use in the enrichment process, two facilities enrich or increase the amount of uranium-235 in the gas, and five facilities fabricate the uranium into fuel for commercial nuclear power plants. These facilities possess large quantities of materials that are potentially hazardous (i.e., explosive, radioactive, toxic, and/or combustible) to workers. The facilities' diverse activities makes it particularly challenging for NRC to design a "one size fits all" safety oversight process and to develop indicators and thresholds of performance. In its recently proposed new risk-informed safety oversight process for material licensees, NRC has yet to resolve such issues as the structure of the problem identification, resolution, and corrective action program; the mechanics of the risk- significance determination process; and the regulatory responses that NRC would take when changes in performance occur. NRC had planned to pilot test the new fuel cycle facility safety oversight process in fiscal year 2001, but staff told us that this schedule could slip. NRC also faces challenges in redefining its role in a changing regulatory environment. As the number of agreement states increases beyond the existing 32, NRC must continue to ensure the adequacy and consistency of the states' programs as well as its own effectiveness and efficiency in overseeing licensees that are not regulated by the agreement states. NRC has been working with the Conference of Radiation Control Program Directors (primarily state officials) and the Organization of Agreement States to address these challenges. However, NRC has yet to address the following questions: (1) Would NRC continue to need staff in all four of its regional offices as the number of agreement states increases? (2) What are the appropriate number, type, and skills for headquarters staff? and (3) What should NRC's role be in the future? Later this month, a NRC/state working group expects to provide the Commission with its recommended options for the materials program of the future. NRC wants to be in a position to plan for needed changes because in 2003, it anticipates that 35 states will have agreements with NRC and that the states will oversee more than 85 percent of all material licensees. Another challenge NRC faces is to demonstrate that it is meeting one of its performance goals under the Government Performance and Results Act-- increasing public confidence in NRC as an effective regulator. There are three reasons why this will be difficult. First, to ensure its independence, NRC cannot promote nuclear power, and it must walk a fine line when communicating with the public. Second, NRC has not defined the "public" that it wants to target in achieving this goal. Third, NRC has not established a baseline to measure the "increase" in its performance goal. In March 2000, the Commission rejected a staff proposal to conduct a survey to establish a baseline. Instead, in October 2000, NRC began an 18-month pilot effort to use feedback forms at the conclusion of public meetings. Twice a year, NRC expects to evaluate the information received on the forms to enhance its public outreach efforts. The feedback forms that NRC currently plans to use will provide information on the extent to which the public was aware of the meeting and the clarity, completeness, and thoroughness of the information provided by NRC at the meetings. Over time, the information from the forms may show that the public better understands the issues of concern or interest for a particular plant. It is not clear, however, how this information will show that public confidence in NRC as a regulator has increased. This performance measure is particularly important to bolster public confidence as the industry decides whether to submit a license application for one or more new nuclear power plants. The public has a long history with the traditional regulatory approach and may not fully understand the reasons for implementing a risk-informed approach and the relationship of that approach to maintaining plant safety. In a highly technical and complex industry, NRC is facing the loss of a significant percentage of its senior managers and technical staff. For example, in fiscal year 2001, about 16 percent of NRC staff are eligible to retire, and by the end of fiscal year 2005, about 33 percent will be eligible. The problem is more acute at the individual office level. For example, within the Office of Nuclear Reactor Regulation, about 42 percent of the technical staff and 77 percent of senior executive service staff are eligible for retirement. During this period of potentially very high attrition, NRC will need to rely on that staff to address the nuclear industry's increasing demands to extend the operating licenses of existing plants and transfer the ownership of others. Likewise, in the Office of Nuclear Regulatory Research, 49 percent of the staff are eligible to retire at the same time that the nuclear industry is considering building new plants. Since that Office plays a key role in reviewing any new plants, if that Office looses some of its highly-skilled, well-recognized research specialists to retirement, NRC will be challenged to make decisions about new plants in a timely way, particularly if the plant is an untested design. In its fiscal year 2000 performance plan, NRC identified the need to maintain core competencies and staff as an issue that could affect its ability to achieve its performance goals. NRC noted that maintaining the correct balance of knowledge, skills, and abilities is critical to accomplishing its mission and is affected by various factors. These factors include the tight labor market for experienced professionals, the workload as projected by the nuclear industry to transfer and extend the licenses of existing plants, and the declining university enrollment in nuclear engineering studies and other fields related to nuclear safety. In October 2000, NRC's Chairman requested the staff to develop a plan to assess the scientific, engineering, and technical core competencies that NRC needs and propose specific strategies to ensure that the agency maintains that competency. The Chairman noted that maintaining technical competency may be the biggest challenge confronting NRC. In January 2001, NRC staff provided a suggested action plan for maintaining core competencies to the Commission. The staff proposed to begin the 5-year effort in February 2001 at an estimated cost of $2.4 million, including the costs to purchase software that will be used to identify the knowledge and skills needed by NRC. To assess how existing human capital approaches support an agency's mission, goals, and other organizational needs, we developed a human capital framework, which identified a number of elements and underlying values that are common to high-performing organizations. NRC's 5-year plan appears to generally include the human capital elements that we suggested. In this regard, NRC has taken the initiative and identified options to attract new employees with critical skills, developed training programs to meets its changing needs, and identified legislative options to help resolve its aging staff issue. The options include allowing NRC to rehire retired staff without jeopardizing their pension payments and to provide salaries comparable to those paid in the private sector. In addition, for nuclear reactor and nuclear material safety, NRC expects to implement an intern program in fiscal year 2002 to attract and retain individuals with scientific, engineering, and other technical competencies. It has established a tuition assistance program, relocation bonuses, and other inducements to encourage qualified individuals not only to accept but also to continue their employment with the agency. NRC staff say that the agency is doing the best that it can with the tools available to hire and retain staff. Continued oversight of NRC's multiyear effort is needed to ensure that it is being properly implemented and is effective in achieving its goals. Mr. Chairman and Members of the Subcommittee, this concludes our statement. We would be pleased to respond to any questions you may have.

This testimony discusses the challenges facing the Nuclear Regulatory Commission (NRC) as it moves from its traditional regulatory approach to a risk-informed, performance-based approach. GAO found that NRC's implementation of a risk-informed approach for commercial nuclear power plants is a complex, multiyear undertaking that requires basic changes to the regulations and processes NRC uses to ensure the safe operation of these plants. NRC needs to overcome several inherent difficulties as it seeks to apply a risk-informed regulatory approach to the nuclear material licensees, particularly in light of the large number of licensees and the diversity of activities they conduct. NRC will have to demonstrate that it is meeting its mandate (under the Government Performance and Results Act) of increasing public confidence in NRC as an effective regulator. NRC also faces challenges in human capital management, such as replacing a large percentage of its technical staff and senior managers who are eligible to retire. NRC has developed a five-year plan to identify and maintain the core competencies it needs and has identified legislative options to help resolve its aging staff problem.

Multiple DHS offices, components, and agencies have roles and responsibilities in DHS's development of CBRN risk assessments, response plans, and capabilities. Specifically: S&T is responsible for the development of DHS's CBRN risk assessments--the TRAs and MTAs. CFO's PA&E unit is responsible for developing resource allocation decisions for capability investments through DHS's Planning, Programming, Budgeting and Execution system. OHA is responsible for leading DHS's biological and chemical defense activities and provides medical and public health expertise to support the department's efforts. OPS is responsible for coordinating DHS's operational activities for incident response, including for CBRN incidents. POLICY is responsible for advising the Secretary of Homeland Security in the development of DHS's policies for CBRN plans and capabilities. NPPD's RMA is responsible for leading DHS's approach to risk management and the application of risk information to departmental activities. DNDO is responsible for domestic radiological and nuclear detection efforts and integration of federal nuclear forensics programs. FEMA is responsible for leading the nation's effort for preparing to respond to emergencies and disasters. DHS engages in risk management activities to help ensure the nation's ability to protect against and respond to incidents using CBRN agents. DHS's Risk Lexicon provides the following definitions for risk-related terms: Risk--potential for an adverse outcome assessed as a function of threats, vulnerabilities, and consequences associated with an incident, event, or occurrence. Risk Assessment--product or process which collects information and assigns values to risks for the purpose of informing priorities, developing or comparing courses of action, and informing decision making. Risk Management--process of identifying, analyzing, assessing, and communicating risk and accepting, avoiding, transferring, or controlling it to an acceptable level considering associated costs and benefits of any actions taken. The department's 2010 Quadrennial Homeland Security Review notes the importance of incorporating information from risk assessments into departmental decision making, one aspect of the department's homeland security risk management process. According to DHS doctrine, risk management applications include the use of risk information to inform, among others, strategic and operational planning and resource decisions. This report focuses on DHS's use of the third step of its risk management process--risk assessment--and the application of risk assessment results to inform CBRN response plans and capabilities. DHS notes that risk information is usually one of many factors--not necessarily the sole factor--that decision makers consider when deciding which strategies to pursue for managing risk. These additional factors may include strategic and political considerations, among others. See figure 1 for a graphic depiction of DHS's risk management process. DHS is responsible for assessing the risks posed by various CBRN agents, as directed by the Project BioShield Act of 2004 and Homeland Security Presidential Directives 10 - Biodefense for the 21st Century, 18 - Medical Countermeasures against Weapons of Mass Destruction, and 22 - National Domestic Chemical Defense. To this end, S&T develops CBRN TRAs and MTAs. Each TRA assesses the relative risks posed by multiple CBRN agents based on variable threats, vulnerabilities, and consequences. Since 2006, DHS has developed eight TRA reports: Biological Terrorism Risk Assessments (BTRA) in 2006, 2008, and Chemical Terrorism Risk Assessments (CTRA) in 2008 and 2010; Radiological/Nuclear Terrorism Risk Assessment (R/NTRA) in 2011; and Integrated CBRN Terrorism Risk Assessments (ITRA) in 2008 and 2011. Each MTA assesses the threat posed by a given, individual CBRN agent or class of agents and the potential number of human exposures in plausible, high-consequence scenarios. Since 2004, DHS has developed 17 MTA reports. DHS uses the MTAs to determine which CBRN agents pose a material threat sufficient to affect national security. The Project BioShield Act describes specific ways in which the MTAs may be used in efforts to procure certain medical countermeasures. However, the various presidential directives note that while the TRAs may be used to inform decision making, they are not specific as to when or how these risk assessments should be used by DHS officials to inform CBRN response planning or capability investments. (U) We identified CBRN-specific interagency response plans among three families of interagency plans developed by DHS that are designed for responding to CBRN incidents. These families of plans include plans developed under (1) Executive Order 13527 - Establishing Federal Capability for the Timely Provision of Medical Countermeasures Following a Biological Attack (Executive Order 13527) and (2) Homeland Security Presidential Directive 8 Annex I - National Planning (HSPD 8 Annex I), and as a part of (3) the National Response Framework's (NRF) CBRN- specific incident annexes.reviewed. Since the first DHS CBRN risk assessments were developed in 2004, DHS used the risk assessments to varying degrees to directly or indirectly inform development of 9 of the 12 CBRN-specific response plans we identified. Our analysis showed that 2 of the 12 plans were directly informed by the risk assessments, while DHS officials told us that 7 of the 12 plans were indirectly informed by the risk assessments. However, we could not independently verify this for these 7 plans because DHS officials could not document how the risk assessments influenced information contained in the plans. Three of the response plans were not informed by the risk assessments, according to DHS officials. Our analysis of a limited set of planning assumptions in the plans compared to information contained in the risk assessments showed general consistency between the plans and the risk assessments. DHS's guidelines state that response plans should be informed by risk assessment information to supplement risk-related information contained in the National Planning Scenarios (NPS) used for developing emergency response plans. DHS's 2009 Integrated Planning System (IPS) also identifies risk assessments as one source of information that should be used to inform response plan development. This guidance, however, does not define what it means for response plans to be informed by risk assessments or how planners should use specific types of risk assessments, such as DHS's TRAs and MTAs, when developing or revising related plans. Of the 12 CBRN response plans developed by DHS that we reviewed, none of the plans were developed solely in response to a given CBRN threat agent being identified as high risk in DHS's CBRN risk assessments. Rather, these plans were developed in response to requirements in an executive order and as part of families of plans developed in response to provisions in presidential directives.table 3 for a list of the CBRN response plans and whether each plan was directly, indirectly, or not informed by DHS's CBRN risk assessments during its development. Since 2004, DHS's use of its CBRN risk assessments to inform its CBRN- specific capability investments has varied, from directly impacting its capabilities to not being used at all. Six of the seven CBRN capabilities we examined were informed by DHS's CBRN risk assessments to some extent, according to program officials, DHS documents, and our analysis (see table 4).was directly informed by the risk assessments, while our analysis showed or DHS officials told us that five of the seven capabilities were partially Our analysis showed that one of the seven capabilities informed by the risk assessments. However, we could not independently verify this for three of these five capabilities because DHS officials could not document how the risk assessments influenced the capabilities. DHS has developed policies and guidance on the use of risk information for the department's activities, but DHS has not issued guidance to program managers that specifies when or how they should use the CBRN risk assessments to inform CBRN capabilities (this is discussed in the third objective of this report). The DHS Strategic Plan for 2008-2013 states that resource decisions should be informed by relevant risk assessments, but does not provide specific guidance on when or how such decisions should be informed by the department's CBRN risk assessments. Additionally, the Secretary of Homeland Security's March 2011 Management Directive stated that DHS policy is to use risk information and analysis to inform decision making and instructs DHS components to establish mission-appropriate risk management capabilities. See table 4 for a summary of the CBRN capabilities and whether each capability was directly, partially, or not informed by DHS's CBRN risk assessments. Our analysis showed that the extent to which the CBRN capabilities we examined were informed by DHS's CBRN risk assessments varied, but DHS officials described reasons for this variance, as discussed below. In addition, DHS officials noted that basic scientific differences between chemical, biological, and radiological/nuclear threat agents and materials also provide explanations about the differences in how the CBRN risk assessments are used to inform capabilities. For example, DHS officials told us that the relative risk rankings amongst biological agents may be more meaningful than the ranking amongst radiological materials because there are greater differences associated with detecting biological agents, as well as their consequences. DHS program managers used the risk assessments to partially inform the program management of the RDCDS and the CSAC, as described below. The Director of the CSAC told us that because there are over 13 million possible chemicals that could be considered threat agents, it is impossible to come up with a relative risk ranking of all the chemicals. Therefore, the results of the CTRA are designed to be representative of the highest risk chemical agents and used as a guide--not a definitive resource--for informing capability and planning decisions related to such agents. Additionally, certain chemical compounds have similar enough compositions to be considered together when developing capabilities and response plans. Rapidly Deployable Chemical Detection System (RDCDS). The OHA Chemical Defense Program used the CTRA to partially inform its RDCDS, according to our analysis as well as DHS officials and documentation. We compared the lists of threat agents that have been programmed to be detected by RDCDS detectors against chemical agents of significant concern in the 2008 and 2010 CTRAs and found that they were generally consistent. The RDCDS program manager told us that the list of threat agents monitored by RDCDS has not changed since 2005 as DHS developed the first and second iterations of the CTRA. However, the program manager told us that when the first CTRA was issued in 2008, program officials reviewed its content to determine whether chemical agents of significant concern in the CTRA were aligned with the chemicals detected by RDCDS. The official said that based on this initial assessment, the RDCDS was generally aligned with the chemical agents of greatest concern. Chemical Security Analysis Center (CSAC). The Director of the CSAC told us that because a key CSAC mission is to develop the CTRA and the chemical MTAs, these risk assessments are used--to varying extents--to inform the other capabilities that the CSAC maintains. Other capabilities include providing 24/7 technical assistance to other DHS components that encounter possible chemical attack situations, such as the National Operations Center. According to the CSAC Director, information from the CTRA is included in the knowledge management system that is used in maintaining this technical assistance capability. However, the CSAC could not provide us with documentation of how it had used the CBRN risk assessments to inform this capability. Further, the CSAC Director told us that the CTRA also informs the CSAC's work in developing models for other DHS components on the effects of certain chemical incidents. We reviewed a CSAC study for the DHS Transportation Security Administration about the release of chemical gases into the atmosphere and found that in the study the CSAC had modeled releases of two different chemical agents, both of which are among the chemical agents of significant concern in the CTRA. We analyzed the extent to which DHS officials used the BTRA and the biological MTAs to inform the program management of three capabilities--BioWatch, the NBFAC, and the NBIC. Our analysis showed that DHS program managers used the risk assessments to either directly inform (BioWatch) or partially inform (NBFAC and NBIC) their decisions, as described below. The program manager of BioWatch told us that it makes sense for the program to use the most reliable tool available to them--in this case, the CBRN risk assessments--to determine what agents to program into their detection system. The director of the NBFAC told us that the BTRA was used on one occasion to directly inform program management and prioritization. The NBIC branch chief told us that the BTRA is used at a strategic level and that the center's staff is very familiar with the contents of the BTRA and the biological MTAs. However, he stated that the NBIC's mission is to monitor detection efforts for all biological agents, particularly emerging infectious diseases, and to provide alerts about potentially dangerous biological incidents to state and local homeland security professionals. Therefore, the NBIC branch chief said that the relative risk ranking of a given biological agent would not be an appropriate basis for the prioritization of resources at the operational level. BioWatch. We found that the BioWatch program was generally consistent with the biological agents of significant concern identified in the BTRA. DHS documents state that the BTRA is to be used to update the list of threat agents monitored by BioWatch. DHS deployed BioWatch in 2003, before the release of the first BTRA in 2006. Since then, DHS has reprogrammed BioWatch detection efforts once, in response to the 2006 BTRA. The BioWatch program manager told us that they review each iteration of the BTRA to ensure that the BioWatch program is aligned with the biological agents of significant concern. We compared the lists of threat agents that have been programmed to be detected by the BioWatch program since 2006 against the biological agents of significant concern in the 2006, 2008, and 2010 BTRAs and found them generally consistent. The BioWatch program manager also told us that future generations of BioWatch are being developed to detect a larger number of biological threat agents. According to BioWatch documents, these agents are to be determined by the BTRA's risk rankings. OHA officials told us they use the BTRA to inform BioWatch because it is the most relevant CBRN risk assessment available to them and because it allows OHA to focus BioWatch detection efforts on the biological agents of significant concern. National Bioforensic Analysis Center (NBFAC). We found that the NBFAC used the CBRN risk assessments to partially inform its capabilities. Officials from NBFAC told us that the center used information from the BTRA to inform its priorities for developing tools needed to support their work in biological forensic attribution. Our analysis showed that the NBFAC's forensic attribution capabilities were generally consistent with the biological agents of significant concern in the BTRA. However, NBFAC officials stated that because the NBFAC is mandated to maintain capabilities for other biological materials, including biological agents that are not considered high risk, future BTRA results would not necessarily lead to reprioritization of NBFAC's attribution capability development efforts. National Biosurveillance Integration Center (NBIC). We found that the NBIC used the CBRN risk assessments to partially inform its activities. According to the OHA branch chief responsible for the NBIC, NBIC personnel are aware of the information in DHS's CBRN risk assessments and consider this information at a strategic level. However, the NBIC could not provide us with documentation of how it had used the CBRN risk assessments to inform its capabilities at the strategic level. The NBIC branch chief also stated that NBIC does not use information from the BTRA or biological MTAs at an operational level to inform the management of their capability. The official provided documentation showing that the NBIC's mission is to collect and integrate information about biological agent detection from a variety of federal government detection systems. The OHA branch chief stated that because the NBIC's mission is to integrate and provide alerts on all biological agents, including emerging and infectious diseases that are not included in the CBRN risk assessments, it is not relevant whether the biological agents the NBIC is monitoring are considered to be high risk according to the BTRA or the MTAs, although these agents are also monitored. Our analysis showed that DHS program managers' use of the risk assessments to inform radiological and nuclear capabilities varied from partially informing their decisions to not informing their decision at all. Officials from the NTNFC told us that because of the relatively small universe of radiological and nuclear materials, the risk rankings among these materials did not matter as much as the relative threat and consequence information for biological and chemical agents. Additionally, DHS officials told us the challenges that first responders would face in responding to a nuclear explosion in a city may be a more important concern than the type of threat material used in such an attack. Nuclear Incident Response Teams (NIRTs). FEMA officials told us that information from the R/NTRA appendix to the 2008 ITRA partially informed the program management of the NIRTs and FEMA's other nuclear response capabilities. Specifically, FEMA officials said that information in the R/NTRA appendix, among other sources, was used to inform FEMA's IND Response and Recovery Program. Starting in 2010, FEMA officials said that NIRT-related activities were aligned with the IND Response and Recovery Program. FEMA officials told us that because of this, their management of the NIRTs is partially informed, by extension, by the R/NTRA appendix. However, FEMA could not provide us with documentation of how it specifically had used the R/NTRA appendix to inform the NIRTs. National Technical Nuclear Forensics Center (NTNFC). An NTNFC official told us that the NTNFC did not use information contained in the R/NTRA appendix to the 2008 ITRA, and the NTNFC does not intend to use the 2011 R/NTRA (once published) to inform its activities. The same official told us that these CBRN risk assessments do not provide useful information to inform NTNFC activities because nuclear forensic capabilities are developed for all radiological and nuclear materials, regardless of their relative risk. Further, he stated that NTNFC is already aware of the universe of possible radiological and nuclear materials that could be used to attack the nation. DHS S&T's Chief Medical and Science Advisor, the official who oversees the development of DHS's CBRN risk assessments, agreed that NTNFC's capabilities need to be able to identify all radiological and nuclear materials, and that therefore the CBRN risk assessments were not relevant for NTNFC's efforts. DHS policy states that DHS components should use risk assessment information to inform planning and capability investment decisions, but DHS has not established specific guidance, such as written procedures, that details when and how DHS components should consider using the department's CBRN-specific risk assessments to inform such activities. According to the National Strategy for Homeland Security of 2007, the assessment and management of risk underlies all homeland security activities, including decisions about when, where, and how to invest in resources--including planning and capabilities--that eliminate, control, or mitigate risks. The TRAs and MTAs--the department's most CBRN- specific risk assessments--were used to inform to varying extents 9 of 12 response plans and 6 of 7 capabilities we analyzed, and how the risk assessments were used to inform these plans and capabilities varied. DHS officials told us that while DHS policy calls for the use of risk information to inform the department's activities, no DHS guidance specifically requires DHS officials to use the TRAs and MTAs for CBRN planning and capability investments or explains how officials should use the risk assessments to inform their decision making. As a result, the CBRN risk assessments were used to varying extents and in varying ways by DHS components for the plans and capabilities we analyzed. DHS officials said that they considered the risk assessments but chose not to use them to inform one of the plans and one of the capabilities we reviewed because they were not useful for the plan or the capability. In addition, the risk assessments were not considered at all for two of the plans we reviewed. Since at least 2007, DHS has emphasized the need to incorporate risk information derived from risk assessments into departmental activities, and since 2009 DHS has issued a range of guidance--including an interim framework, a policy memo, a management directive, and a doctrine--on the use of such risk information. Specifically, DHS's Interim Integrated Risk Management Framework of January 2009 identified risk assessments as a fundamental information source for risk-informed decision making and noted that the BTRA and CTRA are examples of risk assessments produced by the department that can be used to inform risk management efforts. In May 2010, the Secretary of Homeland Security issued a policy memo that requires, among other things, the use of risk assessments to inform decision making and the establishment of mechanisms for sharing risk assessments with relevant stakeholders. In March 2011, as called for in the Secretary's memo, DHS issued a management directive on integrated risk management at the department. This management directive, among other things, tasks the Director of the Office of Risk Management and Analysis (RMA) within DHS's NPPD with establishing a system to facilitate the sharing of risk analysis and data across the department. Further, in April 2011, DHS issued its doctrine for risk management--titled Risk Management Fundamentals--the first in a series of publications that RMA plans to issue to provide a structured approach for the distribution and employment of risk information and analysis efforts across the department. DHS's existing guidance on risk management generally identifies the importance of using risk assessments to inform departmental decision making, but it does not specifically address when and how particular risk assessments--including the TRAs and MTAs--should be considered for use by departmental entities for planning and capability investment purposes. DHS officials stated that more specific guidance has not been developed by the department or its components and agencies because they were not required to do so. However, Standards for Internal Control in the Federal Government state that officials should take actions, such as establishing written procedures, to help ensure that management's directives are carried out.Management Framework of January 2009 stated that DHS must establish processes that make risk information available among the department and its components and agencies when and where it is needed, noting that the ability to receive and provide meaningful and usable risk information in a timely manner requires well coordinated and established processes. In addition, DHS's Interim Integrated Risk While DHS has issued guidance that generally states that risk assessments should be used to inform departmental activities, DHS could better help to ensure that its relevant CBRN-specific risk assessments-- the TRAs and MTAs--are considered for use in informing CBRN-specific planning and capability investments if more specific guidance requiring such consideration is established. DHS officials also stated that establishing written procedures for such consideration could better help to ensure that officials responsible for CBRN response planning and capability investment decision making consider the CBRN risk assessments as a means to obtain current risk information for specific CBRN threat agents. This information could be used to inform the planning assumptions that CBRN response plans are designed to address, as well as the requirements development process for CBRN capabilities. In addition, DHS officials noted that the lack of written procedures requiring DHS officials to consider using the TRAs and MTAs to inform DHS's CBRN plans and capabilities could negatively affect the likelihood that future DHS officials consider using the risk assessments when planning and making investment decisions. By establishing more specific guidance that details when and how DHS components should consider using the TRAs and MTAs to inform CBRN plans and capabilities, DHS would be better positioned to ensure that officials consider and, as appropriate, incorporate the department's most detailed CBRN-specific risk information. As a result, DHS would be better positioned to ensure that its CBRN response plans and capabilities align with the assumptions and results contained within the TRAs and MTAs. The anthrax attacks of 2001 raised concerns that the United States is vulnerable to terrorist attacks using CBRN agents. Since 2001, DHS has developed a range of CBRN risk assessments, response plans, and related capabilities to prepare for such attacks. DHS has spent at least $70 million developing these risk assessments. Using its CBRN risk assessments to help inform CBRN response planning and capability investments is consistent with DHS policy and could help to better ensure that relevant information contained in the risk assessments is used to inform such plans and capabilities. Further, given that there are thousands of CBRN agents that could potentially pose a risk to the nation in an era of declining federal budgets and constrained resources, the federal government must ensure that it is focusing its limited resources on preparing to respond to the highest risk agents. Without procedures for using the risk assessments to inform capability investment decision making, use of the assessments for such decisions may continue to vary or not occur at all. More specific guidance on when and how DHS officials should consider using the department's CBRN risk assessments to inform planning and investments could better help to ensure their consistent use and that this use is sustained beyond the tenure of any given agency official. To better ensure the consistent use of DHS's CBRN risk assessments at the department's components and agencies, we recommend that the Secretary of Homeland Security: Establish more specific guidance, including written procedures, that details when and how DHS components should consider using the department's CBRN risk assessments to inform related response plan and capability investment decision making. We received written comments on the draft report, which are reproduced in full in appendix I. DHS also provided technical comments, which were incorporated as appropriate. DHS concurred with the basis for the recommendation and discussed an action that S&T--which is responsible for developing the department's CBRN risk assessments--plans to take to address the recommendation. Specifically, DHS noted that it is currently developing user guidelines for its CBRN risk assessments. In addition, DHS also stated that S&T is committed to continuing to work with relevant stakeholders to ensure that its risk assessments are useful for informing response planning and capability investment decision making. We are sending copies of this report to the Secretary of Homeland Security, appropriate congressional committees, and other interested parties. The report also is available at no charge on the GAO website at http://www.gao.gov. If you or your staff have any further 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. Key contributors to this report are listed in appendix II. In addition to the contact named above, Edward George (Assistant Director), David Lysy (Analyst-in-Charge), David Schneider, Bonnie Doty, David Alexander, Tracey King, and Katherine Davis made key contributions to this report. National Preparedness: DHS and HHS Can Further Strengthen Coordination for Chemical, Biological, Radiological, and Nuclear Risk Assessments. GAO-11-606. Washington, D.C.: June 21, 2011. Public Health Preparedness: Developing and Acquiring Medical Countermeasures Against Chemical, Biological, Radiological, and Nuclear Agents. GAO-11-567T. Washington, D.C.: April 13, 2011. Measuring Disaster Preparedness: FEMA Has Made Limited Progress in Assessing National Capabilities. GAO-11-260T. Washington, D.C.: March 17, 2011. Biosurveillance: Efforts to Develop a National BioSurveillance Capability Need a National Strategy and a Designated Leader. GAO-10-645. Washington, D.C.: June 30, 2010. Homeland Defense: DOD Can Enhance Efforts to Identify Capabilities to Support Civil Authorities during Disasters. GAO-10-386. Washington, D.C.: March 30, 2010. Combating Nuclear Terrorism: Actions Needed to Better Prepare to Recover from Possible Attacks Using Radiological or Nuclear Materials. GAO-10-204. Washington, D.C.: January 29, 2010. Biosurveillance: Developing a Collaboration Strategy Is Essential to Fostering Interagency Data and Resource Sharing. GAO-10-171. Washington, D.C.: December 18, 2009. Homeland Defense: Planning, Resourcing, and Training Issues Challenge DOD's Response to Domestic Chemical, Biological, Radiological, Nuclear, and High-Yield Explosive Incidents. GAO-10-123. Washington, D.C.: October 7, 2009. Homeland Defense: Preliminary Observations on Defense Chemical, Biological, Radiological, Nuclear, and High-Yield Explosives Consequence Management Plans and Preparedness. GAO-09-927T. Washington, D.C.: July 28, 2009. Project BioShield Act: HHS Has Supported Development, Procurement, and Emergency Use of Medical Countermeasures to Address Health Threats. GAO-09-878R. Washington, D.C.: July 24, 2009. Project BioShield: HHS Can Improve Agency Internal Controls for Its New Contracting Authorities. GAO-09-820. Washington, D.C.: July 21, 2009. National Preparedness: FEMA Has Made Progress, but Needs to Complete and Integrate Planning, Exercise, and Assessment Efforts. GAO-09-369. Washington, D.C.: April 30, 2009. Homeland Security: First Responders' Ability to Detect and Model Hazardous Releases in Urban Areas is Significantly Limited. GAO-08-180. Washington, D.C.: June 27, 2008. Risk Management: Strengthening the Use of Risk Management Principles in Homeland Security. GAO-08-904T. Washington, D.C.: June 25, 2008. Emergency Management: Observations on DHS's Preparedness for Catastrophic Disasters. GAO-08-868T. Washington, D.C.: June 11, 2008. Highlights of a Forum: Strengthening the Use of Risk Management Principles in Homeland Security. GAO-08-627SP. Washington, D.C.: April 15, 2008. Project BioShield: Actions Needed to Avoid Repeating Past Problems with Procuring New Anthrax Vaccine and Managing the Stockpile of Licensed Vaccine. GAO-08-88. Washington, D.C.: October 23, 2007. Homeland Security: Applying Risk Management Principles to Guide Federal Investments. GAO-07-386T. Washington, D.C.: February 7, 2007. Chemical and Biological Defense: Management Actions Are Needed to Close the Gap Between Army Chemical Unit Preparedness and State National Priorities. GAO-07-143. Washington, D.C.: January 19, 2007. Risk Management: Further Refinements Needed to Assess Risk and Prioritize Protective Measures at Ports and Other Critical Infrastructure. GAO-06-91. Washington, D.C.: December 15, 2005. Internal Control: Standards for Internal Control in the Federal Government. GAO/AIMD-00-21.3.1. Washington, D.C.: November 1, 1999.

The 2001 anthrax attacks in the United States highlighted the need to develop response plans and capabilities to protect U.S. citizens from chemical, biological, radiological, and nuclear (CBRN) agents. Since 2004, the Department of Homeland Security (DHS) has spent at least $70 million developing more than 20 CBRN risk assessments. GAO was requested to assess, from fiscal year 2004 to the present, the extent to which DHS has used its CBRN risk assessments to inform CBRN response plans and CBRN capabilities, and has institutionalized their use. GAO examined relevant laws, Homeland Security Presidential Directives, an Executive Order, DHS guidance, and all 12 relevant interagency CBRN response plans developed by DHS. Based on a review of a United States governmentwide CBRN database and DHS interviews, among other things, GAO selected a nongeneralizable set of seven DHS capabilities used specifically for detecting or responding to CBRN incidents to identify examples of DHS's use of its CBRN risk assessments. GAO also interviewed relevant DHS officials. This is a public version of a classified report that GAO issued in October 2011. Information DHS deemed sensitive or classified has been redacted. Since 2004, DHS's use of its CBRN risk assessments to inform its CBRN response plans has varied, from directly influencing information in the plans to not being used at all. DHS guidance states that response planning and resource decisions should be informed by risk information. GAO's analysis showed that DHS used its CBRN risk assessments to directly inform 2 of 12 CBRN response plans GAO identified because planners considered the risk assessments to be more accurate than earlier DHS planning assumptions. For another 7 of the 12 plans, DHS officials said that the assessments indirectly informed the plans by providing background information prior to plan development. However, GAO could not independently verify this because DHS officials could not document how the risk assessments influenced the information contained in the plans. GAO's analysis found general consistency between the risk assessments and the plans. For the remaining 3 plans, DHS officials did not use the risk assessments to inform the plans; for 2 of the 3 plans DHS officials told GAO they were not aware of the assessments. DHS officials also noted that there was no departmental guidance on when or how the CBRN risk assessments should be used when developing such plans. Since 2004, DHS's use of its CBRN risk assessments to inform its CBRN-specific capabilities has varied, from directly impacting its capabilities to not being used at all. Of the 7 capabilities GAO reviewed, one was directly informed by the risk assessments; DHS used its biological agent risk assessments to confirm that its BioWatch program could generally detect the biological agents posing the greatest risk. For 5 of the 7 capabilities, DHS officials said they used the risk assessments along with other information sources to partially inform these capabilities. For example, DHS used its chemical agent risk assessments to determine whether its chemical detectors and the risk assessments were generally aligned for the highest risk agents. For 3 of these 5 capabilities, GAO could not independently verify that they were partially informed by the risk assessments because DHS officials could not document how the risk assessments influenced the capabilities. DHS did not use its CBRN risk assessments to inform the remaining CBRN capability because the assessments were not needed to meet the capability's mission. DHS and its components do not have written procedures to institutionalize their use of DHS's CBRN risk assessments for CBRN response planning and capability investment decisions. Standards for internal control in the federal government call for written procedures to better ensure management's directives are enforced. DHS does not have procedures that stipulate when and how DHS officials should use the department's CBRN risk assessments to inform CBRN response planning and capability investment decisions, and GAO found variation in the extent to which they were used. DHS officials agree with GAO that without written procedures, the consistent use of the department's CBRN risk assessments by DHS officials may not be ensured beyond the tenure of any given agency official. DHS could better help to ensure that its CBRN response plans and capabilities are consistently informed by the department's CBRN risk assessments by establishing written procedures detailing when and how DHS officials should consider using the risk assessments to inform their activities. GAO recommends that DHS develop more specific guidance, including written procedures, that details when and how DHS components should consider using the department's CBRN risk assessments to inform related response planning efforts and capability investment decision making. DHS agreed with the recommendation.

Strategic human capital management is a pervasive challenge facing the federal government. In January 2001, and again in January 2003, we identified strategic human capital management as a governmentwide high- risk area after finding that the lack of attention to strategic human capital planning had created a risk to the federal government's ability to serve the American people effectively. As our previous reports have made clear, the widespread lack of attention to strategic human capital management in the past has created a fundamental weakness in the federal government's ability to perform its missions economically, efficiently, and effectively. In the wake of extensive downsizing during the early 1990s, done largely without sufficient consideration of the strategic consequences, agencies are experiencing significant challenges to deploying the right skills, in the right places, at the right time. Agencies are also facing a growing number of employees who are eligible for retirement and are finding it difficult to fill certain mission-critical jobs, a situation that could significantly drain agencies' institutional knowledge. Other factors such as emerging security threats, rapidly evolving technology, and dramatic shifts in the age and composition of the overall population exacerbate the problem. Such factors increase the need for agencies to engage in strategic workforce planning to transform their workforces so that they will be effective in the 21st century. There are a variety of models of how federal agencies can conduct workforce planning. For example, in 1999 OPM published a five-step model that suggests agencies define their strategic direction, assess their current and future workforces, and develop and implement action plans for closing identified gaps in future workforce needs. Since then, NAPA and the International Personnel Management Association (IPMA) have reported on workforce models used by federal, state, and local governments and industry, and developed their own generic models. Comparing these models, NAPA and IPMA found that the following four steps are generally common to strategic workforce planning efforts: examining future organizational, environmental, and other issues that may affect the agency's ability to attain its strategic goals; determining skills and competencies needed in the future workforce to meet the organization's goals and identifying gaps in skills and competencies that an organization needs to address; selecting and implementing human capital strategies that are targeted toward addressing these gaps and issues; and evaluating the success of the human capital strategies. However, they also reported that federal agencies often implement these steps differently and focus on a variety of issues based on their particular circumstances when preparing their strategic workforce plans. For example, faced with a long lead time to train employees hired to replace those retiring and an increasing workload, SSA focuses a large part of its workforce planning effort on estimating and managing retirements. Unlike SSA, PBGC officials faced a future workload that could rise or fall sharply. Consequently, PBGC focused its November 2002 workforce plan on identifying skills to manage the combined efforts of federal staff and contractors to address a volatile workload. Planning, developing, and implementing workforce planning strategies, such as those that involve reshaping the current workforce through early separations, managed attrition, or increased hiring, can cause significant changes in how an agency implements its policies and programs. Our work on the human capital experiences of leading organizations as well as organizations that are undergoing major mergers and transformations has identified numerous lessons that can help federal agencies successfully implement strategic workforce planning strategies. These lessons include the following: Ensuring that top management sets the overall direction and goals of workforce planning. Top leadership that is clearly and personally involved in strategic workforce planning provides the organizational vision that is important in times of change; can help provide stability as the workforce plan is being developed and implemented; and provides a cadre of champions within the agency, including both political and career executives, to ensure that planning strategies are thoroughly implemented and sustained over time. It can also help integrate workforce planning efforts with other key management planning efforts, such as succession planning and information technology or financial management reforms, to ensure that such initiatives work together to achieve the agency's goals. For example, we have reported that to be effective, succession planning needs the support and commitment of an organization's top leadership. In other countries, government agencies' top leadership (1) actively participates in the succession planning and management programs; (2) regularly uses these programs to develop, place, and promote individuals; and (3) ensures that these programs receive sufficient financial and staff resources and are maintained over time. Involve employees and other stakeholders in developing and implementing future workforce strategies. Agency managers, supervisors, employees, and employee unions need to work together to ensure that the entire agency understands the need for and benefits of changes described in the strategic workforce plan so that the agency can develop clear and transparent policies and procedures to implement the plan's human capital strategies. Involving employees and other stakeholders on strategic workforce planning teams can develop new synergies that identify ways to streamline processes and improve human capital strategies and help the agency recognize and deal with the potential impact that the organization's culture--the underlying assumptions, beliefs, values, attitudes, and expectations generally shared by an organization's members--can have on the implementation of such improvements. Changes that recognize how they may challenge the existing culture, and include appropriate steps to deal with potential problems, are more likely to succeed than strategies that do not. Establish a communication strategy to create shared expectations, promote transparency, and report progress. A communication strategy is especially crucial in the public sector where a full range of stakeholders and interested parties are concerned not only with what human capital and programmatic results will be achieved by a plan, but also with the processes that are to be used to achieve those results. For example, if a workforce plan calls for employing strategies that have not been extensively used before, such as recruitment bonuses, employees may be concerned about whether the processes will be followed consistently and fairly. In general, communication about the goals, approach, and results of strategic workforce planning is most effective when done early, clearly, and often and is downward, upward, and lateral. Figure 2 describes how PBGC adopted several of these lessons during its recent workforce planning efforts. It is essential that agencies determine the skills and competencies that are critical to successfully achieving their missions and goals. This is especially important as changes in national security, technology, budget constraints, and other factors change the environment within which federal agencies operate. For example, as discussed in our July 2003 report on the Department of Homeland Security's (DHS) international cargo container programs, DHS Customs officials have developed two new programs for increasing the security of such cargo that require recruiting and training about 270 staff to work with their foreign counterparts at more than 40 international ports and international shipping companies. To fully implement the new security programs, DHS expects to recruit and train candidates with diplomatic, language, and risk assessment (targeting) skills for 2- to 3-year permanent assignments at foreign ports. We reported that because some of these ports are in countries that our government considers hardship assignments, DHS faces a daunting challenge in attracting U.S. personnel with the necessary skills for these assignments. We recommended, among other improvements, that DHS develop human capital plans that clearly describe how the cargo security programs will meet the programs' long-term demands for skilled staff. DHS officials agreed to develop human capital plans to better ensure the programs' long- term success. We have reported on similar human capital challenges at other agencies. For example, in June 2003, we testified that the Securities and Exchange Commission (SEC) had failed to fill most of the new staff positions it needed to examine recent high-profile corporate failures and accounting scandals. In our June 2002 report on the Federal Energy Regulatory Commission (FERC), we stated that the increasing competitive nature of the natural gas and electricity markets made it critical that FERC have more staff members knowledgeable about how the energy markets work and how to regulate these markets effectively. However, FERC did not have a strategic human capital management plan to guide its efforts to transform its workforce and had not taken full advantage of the personnel flexibilities and tools available to federal agencies in addressing its human capital challenges. In April 2002, we found that the individual federal trade agencies responsible for negotiating, monitoring, and enforcing U.S. trade agreements lacked sufficient staff members with the expertise to perform the necessary economic, technical, and legal analyses for the new agreements. The agencies collectively did not have sufficient expertise to adequately complete these analyses and faced problems with recruitment and high turnover rates. The scope of agencies' efforts to identify the skills and competencies needed for their future workforces varies considerably, depending on the needs and interests of a particular agency. Whereas some agencies may decide to define all the skills and competencies needed to achieve their strategic goals, others may elect to focus their analysis on only those most critical to achieving their goals. The most important consideration is that the skills and competencies identified are clearly linked to the agency's mission and long-term goals developed jointly with key congressional and other stakeholders during the strategic planning process. If an agency identifies staff needs without linking the needs to strategic goals, or if the agency has not obtained agreement from key stakeholders on the goals, the needs assessment may be incomplete and premature. Agencies can use various approaches for making a fact-based determination of the critical human capital skills and competencies needed for the future. For example, PBGC collected qualitative information from interviews with agency executives and managers on the factors influencing the agency's capability to acquire, develop, and retain critical skills and competencies. Another approach, used by the Department of the Army, is to collect extensive information from employee surveys on education, training, and other factors that may influence employees' skills. Information on attrition rates and projected retirement rates, fluctuations in workload, and geographic and demographic trends can also be useful. When estimating the number of employees needed with specific skills and competencies, it is also important to consider opportunities for reshaping the workforce by reengineering current work processes, sharing work among offices within the agency and with other agencies that have similar missions, and competitive sourcing. (See fig. 3 for information on NHGRI's approach for determining critical skills and competencies needed to achieve its strategic goals.) Scenario planning is an approach that agencies have used to manage risks of planning for future human capital needs in a changing environment. As discussed in our April 2003 report on agencies' efforts to integrate human capital strategies with their mission-oriented efforts, scenarios can describe different future environments that agencies may face. For example, after the terrorist attacks of September 11, 2001, and during the creation and implementation of DHS, senior U.S. Coast Guard officials reexamined five long-term scenarios developed in 1999 to describe different environments that could exist in the year 2020. In 1999, these scenarios had been the basis for agency leaders and planners to create operational and human capital strategies that they thought would work well for the U.S. Coast Guard in each independent scenario. After September 11, 2001, agency officials reviewed the scenarios to determine whether additional scenarios were needed in light of the attacks and decided to (1) create new long-term scenarios to guide planning beyond 2005 and (2) generate two scenarios with an 18-month horizon to guide short-term operational and human capital planning. Similarly, to prepare its 2002 strategic workforce plan, PBGC used scenario analysis to determine how the scope and volume of its activities might change in the next 5 years. The strategic workforce plans these organizations developed identify gaps in workforce skills or competencies that they need to fill to meet the likely scenarios rather than planning to meet the needs of a single view of the future. U.S. Coast Guard and PBGC managers believe that by using multiple scenarios they gain flexibility in determining future workforce requirements. Our March 2002 strategic human capital model stressed the importance of agencies developing human capital strategies--the programs, policies, and processes that agencies use to build and manage their workforces--that are tailored to their unique needs. Applying this to strategic workforce planning means that agencies (1) develop hiring, training, staff development, succession planning, performance management, use of flexibilities, and other human capital strategies and tools that can be implemented with the resources that can be reasonably expected to be available and (2) consider how these strategies can be aligned to eliminate gaps and improve the contribution of critical skills and competencies that they have identified between the future and current skills and competencies needed for mission success. For example, we reported that to manage the succession of their executives and other key employees, agencies in Australia, Canada, New Zealand, and the United Kingdom are implementing succession planning and management practices that protect and enhance organizational capacity. Specifically, their initiatives identify high-potential employees from multiple organizational levels early in their careers as well as identify and develop successors for employees with critical knowledge and skills. In addition, because they are facing challenges in the demographic makeup and diversity of their senior executives, agencies in other countries use succession planning and management to achieve a more diverse workforce, maintain their leadership capacity as their senior executives retire, and increase the retention of high-potential staff. Also, in June 2003, we testified that although the Federal Bureau of Investigation (FBI) has taken some steps to address short-term human capital needs related to implementing its changed priorities, as well as completing a framework for a revised strategic plan, it has not completed a strategic human capital plan. We observed that the FBI should build a more long-term approach to human capital by completing a strategic human capital plan that outlines, among other things, the results of a data- driven assessment of its needs for critical skills and competencies. Such an analysis could become the basis for FBI officials deciding how to maximize the use of available human capital flexibilities as a strategy for recruiting and retaining agents with critical skills, intelligence analysts, and other critically needed staff. Our 2002 strategic human capital model identifies aspects of human capital management that enable agencies to maximize their employees' contributions, such as (1) the continuing attention of senior leaders and managers to valuing and investing in their employees; (2) an investment in human capital approaches that acquires, develops, and retains the best employees; and (3) the use of performance management systems that elicit the best results-oriented performance from the staff, and indicators to measure the effectiveness of human capital approaches. Before beginning to develop specific workforce strategies, an agency can assess these aspects of its human capital approach, using OPM's Human Capital Assessment and Accountability Framework, which OPM developed in conjunction with the Office of Management and Budget (OMB) and GAO; our model; and other tools. The results will help agencies develop a sense of the obstacles and opportunities that may occur in meeting their critical workforce needs For example, an agency that attempts to develop creative and innovative strategies will have a difficult time implementing the strategies if its assessment concludes that its overall human capital approach (1) does not effectively value people as assets whose value can be enhanced and (2) is not results oriented. Much of the authority that agencies' leaders need to tailor human capital strategies to their unique needs is already available under current laws and regulations. Therefore, in setting goals for its human capital program and developing the tailored workforce planning strategies to achieve these goals, it is important for agencies to identify and make use of all the appropriate administrative authorities to build and maintain the workforce needed for the future. As our December 2002 report states, this will involve agencies reexamining the flexibilities provided to them under current authorities, and identifying existing flexibilities that they could use more extensively, to develop workforce planning strategies. These flexibilities may include providing early separation and early retirement incentives authorized by the Homeland Security Act of 2002, recruitment and retention bonuses and allowances, alternative work schedules, and special hiring authorities to recruit employees with critical skills. (See fig. 4 for information on DOL's use of flexibilities to recruit individuals with business skills.) In a December 2002 report, we identified key practices that agencies need to employ to effectively take advantage of existing and new human capital authorities. Two of these practices--ensuring that the use of flexibilities is part of an overall human capital strategy and ensuring stakeholder input in developing flexibilities-related policies and procedures--are intrinsic to effective workforce planning and have already been discussed. However, as agencies plan how to implement specific workforce strategies that include flexibilities, it is important that they also consider other practices that are important to the effective use of flexibilities. These include the following: Educate managers and employees on the availability and use of flexibilities. Managers and supervisors can be more effective in using human capital strategies that involve new flexibilities, such as recruitment bonuses, if they are properly trained to identify when they can be used and how to use the agency's processes for ensuring consistency, equity, and transparency. To avoid confusion and misunderstandings, it is also important to educate employees about how the agency uses human capital flexibilities and employee rights under policies and procedures related to human capital. Streamline and improve administrative processes. It is important that agencies streamline administrative processes for using flexibilities and review self-imposed constraints that may be excessively process oriented. Although sufficient controls are important to ensure consistency and fairness, agency officials developing a workforce strategy that uses flexibilities should look for instances in which processes can be reengineered. Build transparency and accountability into the system. Clear and transparent guidelines for using specific flexibilities, and holding managers and supervisors accountable for their fair and effective use, are essential to successfully implementing workforce strategies. Guidelines can be used to (1) provide well-defined and documented decision-making criteria for using flexibilities and help ensure that they are consistently applied and (2) minimize managers' and supervisors' potential reluctance to use flexibilities by addressing their concerns that without guidelines, employees may see them as unfairly applying the flexibilities. An agency can also use a results-oriented performance management system to reinforce managers' accountability for implementing human capital strategies. In October 2000, OPM amended regulations to require agencies to, among other things, appraise executive performance by balancing organizational results with areas such as employee perspective. We reported on selected agencies' implementation of a set of balanced performance expectations for senior executives and identified examples of executives' expectations. Examples of these performance expectations were to "help attract and retain well-qualified employees" and "ensure workforce has skills aligned with the agency's objectives." (See fig. 5 for information on GSA Region 3's efforts to build the capacity to support its workforce strategies.) High-performing organizations recognize the fundamental importance of measuring both the outcomes of human capital strategies and how these outcomes have helped the organizations accomplish their missions and programmatic goals. 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. Identifying both types of measures, and discussing how the agency will use these measures to evaluate the strategies before it starts to implement the strategies, helps agency officials think through the scope, timing, and possible barriers to evaluating the workforce plan. Periodic measurement of an agency's progress toward human capital goals and the extent that human capital activities contributed to achieving programmatic goals provides information for effective oversight by identifying performance shortfalls and appropriate corrective actions. For example, a workforce plan can include measures that indicate whether the agency executed its hiring, training, or retention strategies as intended and achieved the goals for these strategies, and how these initiatives changed the workforce's skills and competencies. It can also include additional measures that address whether the agency achieved its program goals and the link between human capital and program results. An agency's evaluation of its progress implementing human capital strategies would use the first set of measures to determine if the agency met its human capital goals and identify the reasons for any shortfalls, such as whether the agency's implementation plan adequately considered possible barriers to achieving the goals, established effective checkpoints to allow necessary adjustments to the strategy, and assigned people with sufficient authority and resources. Further evaluation may determine that although the agency achieved its workforce goals, its human capital efforts neither significantly helped nor hindered the agency from reaching its programmatic goals. This could occur if an agency misjudged the relationship between human capital and programmatic goals when developing workforce plans and consequently has mistakenly estimated the magnitude of changes in human capital strategies that were needed to achieve program goals. These results could lead to the agency revising its human capital goals to better reflect their relationship to programmatic goals, redesigning programmatic strategies, and possibly shifting resources among human capital initiatives during the next planning cycle. Developing meaningful outcome-oriented performance goals and collecting performance data to measure achievement of these goals is a major challenge for many federal agencies. Performance measurement tends to focus on regularly collected data available on direct products and services provided by a program, such as the number of staff trained to carry out an activity. In cases where outcomes are not quickly achieved or readily observed, such as assessing the impact a training program has on achieving an agency's goals, performance measurement is more complex. Federal agencies in general have experienced difficulties in defining practical and meaningful measures that assess the impact human capital strategies have on programmatic results. For example, in its fiscal year 2003 performance plan, the Federal Emergency Management Agency identified goals of streamlining its organization and developing its workforce, but listed no measures to gauge progress for either goal. In contrast, the Environmental Protection Agency's (EPA) fiscal year 2003 performance plan includes measures of the agency's efforts to achieve activity-oriented human capital goals, such as implementing a workforce planning model at five offices by the end of the year and completing a comprehensive pay review. These performance measures provide a base upon which EPA can seek to gauge how well its human capital efforts help the agency to achieve its programmatic goals. The challenge faced by EPA and other agencies in using such measures is that there is not always a clear link between specific human capital strategies and strategic programmatic outcomes. This is partly because there may be multiple causes of a specific outcome, only one of which is related to a targeted human capital strategy, and unforeseen circumstances that affect implementation of a strategy. Our recent testimony on human capital challenges at the SEC and key trade agencies illustrates the practical difficulties that agencies may encounter. We testified that during 2001, U.S. trade agencies increased staff levels to address insufficient monitoring and enforcement of trade agreements. However, we noted that measuring the effectiveness of this strategy might be difficult because the agencies' workloads in other areas continue to grow, which could cause them to shift resources intended for trade compliance to other program areas. If shifts in resources occur, the agencies may not be able to improve the effectiveness of trade compliance efforts, even though the human capital strategy initially succeeded in acquiring additional resources. OPM's Human Capital Assessment and Accountability Framework, developed in conjunction with OMB and GAO, presents consolidated guidance on standards for success and performance indicators that agencies can refer to as they transform their strategic human capital management programs. For example, it includes such strategic workforce planning indicators as whether agencies use best practices to determine workloads and resource needs and have documented strategies for workforce planning that define roles, responsibilities, and other requirements of the strategies. As we stated in January 2003, the framework represents a promising step that can improve agencies' human capital systems. Agencies can use its indicators as a basis for developing, implementing, and evaluating their workforce planning processes. Generally, agencies will need more specific indicators to measure the success of their workforce plans. (See fig. 6 for information on SSA's evaluation of retirement-related workforce strategies.) There is an increasing awareness that federal agencies need to transform themselves into more efficient, results-oriented organizations if they are to meet the many fiscal, management, and policy challenges of the 21st century. To meet these challenges, federal managers will need to direct considerable time, energy, and targeted investments toward efforts that make the best use of the government's most important resource--the people that agencies employ now and in the future. They will also need effective strategic workforce planning to identify and focus these investments on the long-term human capital issues that most affect their ability to attain mission results. The principles presented here can enhance the effectiveness of an agency's strategic workforce planning by helping the agency focus on the issues it needs to address, the information it needs to consider, and the lessons that it can learn from other organizations' experiences. By doing so, agencies can better ensure that their strategic workforce planning processes appropriately address the human capital challenges of the future and better contribute to the agencies' major efforts to meet their missions and goals. We provided a draft of this report to the Secretary of Labor, the Executive Director of PBGC, the Director of NIH, the Administrator of GSA, and the Commissioner of SSA. Each of these organizations provided comments on the draft report and agreed with the information presented. DOL's Director of Workforce Planning and Diversity; PBGC's Chief Human Capital Officer; and GSA's Program Management Officer, Office of the Chief People Officer, also provided written technical comments to clarify specific points regarding the information presented. Where appropriate, we have made changes to reflect those technical comments. NIH and SSA officials did not provide technical comments. In addition to technical comments, GSA noted that while the report presents a case study on workforce planning efforts of one region, GSA has used and continues to use a robust agencywide workforce planning process. We have clarified the report to recognize that our example is limited to the activities of one GSA region and does not address the agency's overall workforce planning efforts. We are sending copies of this report to other interested congressional parties, the Director of OPM, the Secretary of Labor, the Secretary of Health and Human Services, the Commissioner of the Social Security Administration, the Director of the National Institutes of Health, and the Executive Director of the Pension Benefit Guaranty Corporation. In addition, we will make copies available to others upon request. The report will also 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 or William Doherty on (202) 512-6806. Others who contributed to this report were Bob Lilly, Adam Hoffman, Andrew Edelson, and Candyce Mitchell. To identify strategic workforce planning principles and illustrative agency examples, we gathered and analyzed information from a variety of sources. We reviewed our own guidance, reports, and testimonies on federal agencies' workforce planning and human capital management efforts, and guidance available through the Internet and leading human capital periodicals, such as the Workforce Planning Resource Guide for Public Sector Human Resource Professionals issued by the International Personnel Management Association. We also met with officials from organizations with governmentwide responsibilities for or expertise in workforce planning, such as the Office of Personnel Management and the National Academy of Public Administration, to identify additional guidance available and to obtain their recommendations of federal agencies engaged in effective workforce planning. We synthesized information from these meetings, reports, and guidance documents and our own experiences in human capital management to (1) derive five principles that appeared most important to effective strategic workforce planning and (2) identify agencies we would contact for examples of workforce planning that illustrated these principles. We then selected five examples of agencies' workforce planning activities (one example corresponding to each of the five workforce planning principles) to present in the report. We met with human capital and program officials and analyzed documents related to these examples to more fully understand the specific workforce planning issues associated with the examples and how the agencies addressed these issues. We selected the examples that in our judgment collectively illustrated these principles across a diverse set of federal programs. Because our review objectives did not include evaluating the effectiveness of agencies' workforce planning processes, we did not evaluate these processes nor did we require the presence of evaluations or other evidence demonstrating planning effectiveness as a criterion for selecting examples. We did exclude from consideration, however, processes that agencies were just beginning or that were not complete enough for agencies to be willing to present them as successful planning efforts. The fact that an agency is profiled to illustrate the principles of a particular planning step is not meant to imply complete success for addressing the matter or lack of success for addressing other aspects of workforce planning. Furthermore, the efforts in the examples do not represent all the potential ways that an agency can implement workforce planning or address the specific human capital issue being discussed. We conducted our work in Washington, D.C., from March 2002 through October 2003, in accordance with generally accepted government auditing standards. 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. 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The federal government is in a period of profound transition and faces an array of challenges and opportunities to enhance performance, ensure accountability, and position the nation for the future. Effective results-oriented management of the government's most valued resource--its people--is at the heart of this transition. This report is part of a large body of GAO work examining issues in strategic human capital management. Based on GAO's reports and testimonies, review of studies by leading workforce planning organizations, and interviews with officials from the Office of Personnel Management and other federal agencies, this report describes the key principles of strategic workforce planning and provides illustrative examples of these principles drawn from selected agencies' strategic workforce planning experiences. 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 for acquiring, developing, and retaining staff to achieve programmatic goals. While agencies' approaches to workforce planning will vary, GAO identified five key principles that strategic workforce planning should address irrespective of the context in which the planning is done: (1) involve top management, employees, and other stakeholders in developing, communicating, and implementing the strategic workforce plan, (2) determine the critical skills and competencies that will be needed to achieve current and future programmatic results, (3) 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, (4) build the capability needed to address administrative, educational, and other requirements important to support workforce planning strategies, and (5) 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.

OPS is responsible for the safety oversight of NG and HL pipelines and LNG storage facilities. OPS operations are primarily funded from user fees assessed to approximately 750 pipeline and storage facility operators,with additional funding provided by the Oil Spill Liability Trust Fund (OSLTF). In addition, Congress has partially funded OPS operations by making a permanent reduction in the accumulated PSF balance carried over from the prior years. User fees were first assessed to operators for fiscal years 1986 and 1987. User fees collected during those years were accumulated in the PSF to establish a beginning balance in the fund. For fiscal years 1986 and 1987, pipeline safety operations continued to be funded by general revenue appropriations. Beginning in fiscal year 1988, OPS operations were no longer funded by general revenues but instead were funded primarily by user fee assessments, which are billed after the fiscal year starts. For each fiscal year from 1988 forward, the accumulated balance in the PSF has been used to temporarily fund operations until the user fees are collected. As indicated below, the annual appropriation prescribes funding levels and sources of funds for OPS operations. Therefore, the amount of the total fiscal year user fee assessment can only be determined after the appropriation is enacted due to the uncertainty of the components that constitute the appropriation and the total appropriation amount. For fiscal year 2000, OPS' appropriation was funded from the sources listed in table 1. As discussed later, the actual amount of user fees charged is adjusted for a number of reasons, such as to provide a RSPA administrative support charge and to compensate for the over or under collection of prior year fees. Once the total fiscal year user fee assessment is determined, it is divided into three pools representing the three types of operators.Individual operator assessments are then calculated based either on pipeline mileage or storage capacity data maintained by OPS. After individual operator assessments are determined, OPS can begin billing operators. Our objectives were to determine (1) how RSPA's analysis determined the required minimum reserve fund balance, (2) if the analysis was accurately prepared based on RSPA/OPS financial records and Treasury reports, (3) how OPS' billing and collection cycles function, and (4) if changes in the way OPS assesses user fees and collects cash would result in a more efficient use of user fees. To determine how RSPA calculated the required reserve fund balance, we conducted interviews with OPS officials who prepared and reviewed the analysis. We also obtained an understanding of how the analysis conclusion is linked to the analysis detail and identified assumptions made in the analysis. To determine whether the analysis was accurate, we conducted interviews with OPS and RSPA officials who prepared and reviewed the analysis, identified and assessed the reasonableness of assumptions made, compared data presented in the analysis to data in RSPA's financial systems and Treasury reports, and performed some recalculations of data. We did not perform any audit or review procedures that would allow us to attest to the accuracy of the historical data presented in the analysis. To determine how OPS' billing and collection cycles function, we obtained an understanding of those cycles as they pertain to the PSF through interviews with OPS officials and the review of OPS documentation. Finally, to determine whether improvements could be made to OPS' billing and collection cycles to support a more efficient use of user fees, we identified and discussed alternatives with OPS officials. We received written comments on a draft of this report from the Department of Transportation. We also received several technical comments, which we incorporated as appropriate. A copy of DOT's response is reprinted in appendix I. We conducted our review from November 2000 through March 2001 in accordance with U.S. generally accepted government auditing standards. Significant flaws in RSPA's financial analysis used to determine the estimated minimum balance for the PSF make the estimate unreasonable. Under current practices, the year-end balance in the PSF is used to fund certain operational expenses pending the receipt of user fee assessments from pipeline and storage facility operators for the following year. In its analysis report, RSPA concluded that at least 36 percent of the enacted appropriation in a given fiscal year should be maintained as a minimum balance in the PSF to cover obligations for the first two quarters of the fiscal year and avoid violation of the Antideficiency Act. However, our review indicated that the analysis was unreasonable due to (1) the use of an inappropriate key assumption, (2) the inappropriate use of a fixed percentage to estimate the minimum balance in the PSF, and (3) RSPA's use of incorrect or unreliable financial data in performing its calculations. RSPA's methodology was based on the assumption that the minimum PSF balance at the end of the fiscal year must be sufficient to cover estimated obligations for the first two quarters (October through March) of the following fiscal year. Based on fiscal year 2000 historical data, the analysis projected the estimated future minimum PSF balance as a percentage that was calculated for fiscal year 2000 as follows (dollars in millions): In designing the formula, RSPA staff advised us that they did not consider cash receipts for the first two quarters because they believed that the process of obtaining Treasury warrants, necessary to enter into obligations, would result in the majority of the funds being unavailable for obligation until halfway through the fiscal year. However, through interviews and reviewing warrant documentation, we noted that warrants authorizing the obligation of available balances could be obtained from Treasury in several days. For fiscal year 2000, OPS data showed that $3.6 million of its user fees were received by the end of December 1999, and an additional $23.9 million of fees were received by the end of January 2000. In the RSPA analysis, none of these collections, totaling $27.5 million, were considered available for obligation in the first or second quarter. Per the analysis, total obligations incurred by OPS from October 1999 through January 2000 totaled only $5.2 million, while the beginning balance of the fund at October 1, 1999, was $ 15.9 million. OPS staff's misunderstanding of the warrant procedures, and hence the failure to consider available user fee collections in the analysis, significantly overstated the calculation of the estimated minimum balance required in the PSF. RSPA's analysis also incorrectly presumes that a fixed percentage of the user fee assessment base, as calculated using the fiscal year 2000 data, will result in a factor that can be used to calculate the minimum balance for the coming year. However, this assumes a direct and constant relationship between obligations and the user fee assessment base, which, based on RSPA's own analysis for fiscal years 1998, 1999, and 2000, does not exist. Table 3 below shows that obligations in the first 6 months were a growing percentage of the user fee assessment base during the 3 years analyzed. Absent any such constant relationship, obligations as a percentage of the user fee assessment base cannot be used as a reliable predictor of the minimum balance needed in the PSF. Instead of a fixed percentage, the amount needed in the PSF depends on the timing and amounts of expected obligations and cash collections during the early part of the new fiscal year. The amount of obligations is affected by the level and types of program activities planned. From one year to the next, obligation patterns may change significantly, particularly if significant changes are made in the level and nature of OPS activities. For this reason, there is no assurance that a fixed percentage calculation of the assessment base, enacted appropriations, or any other base would generate an appropriate carryover balance. Using hypothetical data, figure 1 below demonstrates that a comparison between expected cumulative PSF obligations and expected cumulative cash collections will identify the maximum expected shortfall in the early part of the fiscal year. In this figure, obligations are assumed to start at the beginning of the year (time A) and cash collections some time later (time B). The shaded area shows the time during which cumulative year to date obligations exceed cumulative year to date cash collections. The widest point (time D) identifies the minimum beginning fund balance necessary in the PSF. In general, the later that fees are collected the larger the needed balance. At time E, cumulative cash collections equal cumulative obligations and the current year's shortage is eliminated. In order to ensure that the estimated minimum balance as calculated in this manner is adequate to cover the shortfall, this type of analysis would need to be completed each year. This annual reestimate, which could be adjusted to cover possible contingencies, would be particularly important given the fluctuations in levels of obligations that have occurred early in the year over the past several fiscal years. Notwithstanding the previously noted flaws in its approach, certain data included in RSPA's analysis were incorrect and/or unreliable. For example, as permitted by law, OPS assessed additional fees of approximately $0.9 million to pipeline operators, but these fees were omitted from the analysis. Using RSPA's data, we estimated that the omission of these additional fees from the analysis further overstated the minimum PSF balance. RSPA also included in its analysis historical data, such as user fee cash receipts, and obligations that did not agree with either data in RSPA's accounting system or other documentation, such as reports prepared for Treasury. For example, the cash receipts data for the first two quarters of fiscal year 2000 that were included in the analysis, were taken from a database that RSPA accounting provides OPS to account for assessments receivable. It was approximately $363,000 less than the cash receipts recorded in OPS' accounting system. Since this and other differences were not reconciled by OPS, we were unable to determine the effect they may have on the estimated minimum PSF balance. Further, the beginning PSF balance used by RSPA in its analysis was understated when compared to balances per Treasury, because certain transactions, such as cancellations of previously recorded obligations, were not recorded by RSPA accounting. These Treasury-initiated transactions were not considered in the analysis because OPS did not perform monthly reconciliations of the PSF book balance to the balance with Treasury. The cancellation of obligations increases the available PSF balance. For example, the beginning PSF balance in the analysis for fiscal year 2000 of $15.9 million was $1.1 million less than the Treasury balance of $17 million. This unreconciled difference could have a material impact on the recorded PSF balance or decisions regarding such balance. Finally, we noted that the month-by-month data included in RSPA's analysis contained obligation amounts that could be misleading. We found that the monthly amounts of obligations for the first 5 months of fiscal year 2000 included approximately $1 million of OSLTF-related obligations. During March 2000, however, these obligations were reimbursed by the OSLTF and were reversed in the analysis. Therefore, RSPA's overall calculation was not affected. OPS' lengthy data collection and verification process, used to determine and bill user fees for 750 pipeline operators, contributed to a delay in billing and the subsequent collection of cash. If user fee assessments were mailed out sooner, then collection of cash receipts would likely be accelerated and the minimum required PSF balance would be lower. RSPA has efforts underway to improve this process, including planned implementation of an Internet-based data collection system and a new accounting system. The collection and verification of data used for OPS' fiscal year 2000 assessment extended over 11 months. For example, the December 31, 1998, data used for the fiscal year 2000 billing were not finalized until late November 1999. The majority of that time was used to update information for NG pipeline operators, one of three types of operators. OPS maintains a database for assessing pipeline and storage facility operators as well as supporting its regulatory activities. Data are updated each year and that process begins with asking NG pipeline operators to complete annual reports, which contain, among other things, details on pipeline mileage that are needed to calculate assessments. After NG pipeline operators submit their annual reports, information is updated in the OPS database. Subsequently, NG pipeline operators, as well as HL pipeline operators and LNG storage facilities (neither of which have to prepare annual reports) are sent annual notices to verify information in the database, which is used for fee assessment purposes. For the fiscal year 2000 assessment, annual report forms were sent to NG pipeline operators in mid-December 1998, and the completed annual reports were due to OPS by March 15, 1999. Later, notices to verify data in the database were sent to all operators in August 1999 with corrections due to OPS in 45 days. After the verification notice was sent, OPS employees responded to operator inquiries and corrections and further updated the database. This process was completed in late November. The extended data collection and verification process contributed to a delay in the mailing of user fee bills, which did not occur until mid-December 1999. The timing of activities is summarized in table 4. Since operator assessments are calculated based on the annual appropriation, the calculation of individual user fee assessments can begin after the appropriation is enacted, which has been in the month of October for the last several years. In recent years, OPS' operator billing has occurred considerably earlier in the fiscal year. For example, in fiscal year 1994, OPS assessed user fees in July 1994, whereas by fiscal year 1997, OPS was successful in moving the user fee assessment date up to December 1996. Since 1997, OPS has billed operators in mid-December of each fiscal year. However, since the user information on which bills are based is as of December 31 of the previous year, there is still room for improvement in OPS' data collection and verification process. According to OPS officials, this delay is due to resource limitations. RSPA is planning to improve its current billing procedures. For example, in the summer of 2001, an Internet-based system is scheduled to be implemented that will allow operators to electronically enter pipeline mileage, ownership, and other necessary information directly into the database. This will relieve OPS of a considerable amount of data input and reduce the amount of reconciliatory and investigative efforts for pipeline ownership and mileage. Based on information provided directly by pipeline operators, OPS would be able to generate and mail bills electronically, further reducing the time necessary to bill and collect fees. In addition, in fiscal year 2001, RSPA implemented a new accounting system that includes features anticipated to improve OPS' billing and collection process. These features include invoicing, payment tracking, maintaining individual customer account balances, and generating follow- up notices for delinquent balances. This should free up OPS resources so staff can concentrate on issuing user fee assessments earlier, which would likely accelerate the collection of fees and reduce the minimum balance needed in the PSF. The use of incorrect or unreliable data and inappropriate assumptions in RSPA's calculation of the minimum PSF balance resulted in RSPA overstating the necessary minimum balance. Crucial to a reasonable calculation of the PSF minimum balance is an analysis of expected receipts as compared to expected obligations. Until RSPA performs this type of analysis, it will not be able to provide a reasonable estimate of the required minimum PSF balance. In addition, the timing of OPS' cash receipts is affected by OPS' untimely data collection and verification process. This process results in delayed billings and likely delays cash receipts, resulting in a larger required minimum PSF balance. OPS' current efforts to implement a new Internet- based data collection and billing system have the potential to shorten what is currently an extended billing process. Finalizing the operator data on which the fee assessments are based at an earlier date would allow billing to take place shortly after the agency received its appropriation for the fiscal year. Accordingly, fee revenue would likely be available for obligation in a more timely manner and help reduce the required minimum PSF balance. In order to provide for a reasonable calculation of the minimum PSF balance and to improve the user fee billing process, we recommend that the Secretary of the Department of Transportation direct RSPA's Administrator to take the following actions: Base calculations for future years on an analysis of the timing and amounts of expected obligations and cash collections associated with the level and types of program activities planned. Annually calculate the expected minimum balance for the PSF to take into consideration changes in expected obligations and collections. Take steps, including reconciliation of conflicting data, to ensure that the financial information used in the analysis is accurate and that it includes all of the relevant revenue factors. Complete installation of the Internet-accessible database system allowing on-line input and verification of operator data and electronic mailing of bills. Reengineer the operator data collection and verification processes so that all data on which bills will be based are finalized by October 1 annually to allow for timely billing. DOT generally agreed with our findings, conclusions, and recommendations. In addition, department officials provided technical comments on the draft report, which we have incorporated as appropriate. We are sending copies of this report to congressional committees and subcommittees responsible for transportation safety issues; the Honorable Norman Y. Mineta, Secretary of Transportation; Edward Brigham, the Acting Deputy Administrator of RSPA; and other interested parties. If you have any questions about this report, please contact me at (202) 512- 9508 or John C. Fretwell, Assistant Director, at (202) 512-9382. Key contributors to this report were Richard Kusman, Tarunkant Mithani, and Maria Zacharias. 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 also accepted. 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) Washington, DC 20013 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)

The use of incorrect or unreliable data and inappropriate assumptions in the Research and Special Program Administration's (RSPA) calculation of the minimum Pipeline Safety Fund (PSF) balance caused RSPA to overstate the necessary minimum balance. Crucial to a reasonable calculation of the PSF minimum balance is an analysis of expected receipts as compared to expected obligations. Until RSPA does this type of analysis, it will be unable to reasonably estimate the required minimum PSF balance. In addition, the timing of the Office of Pipeline Safety's (OPS) cash receipts is affected by OPS' slow data collection and verification process. This process results in delayed billings and likely delays cash receipts, resulting in a larger required minimum PSF balance. OPS' current efforts to implement a new Internet-based data collection and billing system could shorten what is now an extended billing process. Finalizing the operator data on which the fee assessments are based at an earlier date would allow billing to take place shortly after the agency received its appropriation for the fiscal year. Accordingly, fee revenue would likely be available for obligation in a more timely manner and help reduce the required minimum PSF balance.

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 that borrowers 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 decrease the loan balance. The HECM program began in 1988, when Congress authorized HUD to insure reverse mortgages to meet the financial needs of elderly homeowners. While HECMs can provide senior homeowners with multiple types of benefits, including flexibility in how they use the loan funds and protection against owing more than the value of the house when the loan comes due, HECM costs can be substantial. The volume of HECMs made annually has grown rapidly, rising from 157 loans in fiscal year 1990 to more than 112,000 loans in fiscal year 2008. In addition, recent years have seen a large increase in the number of lenders participating in the HECM program, with more than 1,500 lenders originating their first HECM in 2008, bringing the total number of HECM lenders to over 2,700. A number of federal and state agencies have roles in overseeing the reverse mortgage market. These agencies include HUD, which administers the HECM program and oversees entities that provide mandatory counseling to prospective HECM borrowers. In addition, the Federal Trade Commission (FTC), federal and state banking regulators, and state insurance regulators are involved with various aspects of consumer protections for HECM borrowers. Various state and federal agencies have some responsibility for assessing marketing for reverse mortgage products, including FTC, federal and state banking regulators, and HUD. The agencies each have a responsibility for different segments of the reverse mortgage market, but have reported taking few, if any, enforcement actions against an entity as a result of misleading reverse mortgage marketing. FTC has responsibility for protecting consumers against unfair or deceptive practices originating from nonbank financial companies, such as mortgage brokers. FTC officials said they have not systematically searched for potentially misleading reverse mortgage marketing, but noted that they are maintaining an awareness of the potential risks associated with reverse mortgage marketing and have formed a task force of state and federal regulators and law enforcement agencies, in part to learn about complaints related to reverse mortgages. In addition, 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), the Federal Deposit Insurance Corporation (FDIC) and the National Credit Union Administration (NCUA)--include a review of reverse mortgage marketing materials in their compliance examinations of lenders for whom they have responsibility, but, because few of their regulated lenders offer reverse mortgages, they have not conducted many examinations that have included these loans. Like FTC, federal banking regulators are maintaining an awareness of the potential risks associated with reverse mortgages, which could include those associated with reverse mortgage marketing. For example, 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. Finally, some HECM lenders are regulated at the state level, with HECM marketing materials subject to state compliance examinations. Information we obtained from 22 of the 35 state banking regulators that responded to our information request indicated that their states 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, HUD exercises limited regulatory authority over the marketing activity of HECM lenders to ensure that lenders' advertisements do not imply endorsement by HUD or the Federal Housing Administration. HUD officials cited one instance in which it referred a lender to the Mortgagee Review Board for misrepresenting the HECM as a "government rescue loan." 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 are one factor that could trigger more extensive assessments of marketing materials, they have received few, if any, complaints about reverse mortgage marketing. However, FTC officials noted that the low volume of complaints could be a result of consumers not being aware that they have been deceived, 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. 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 a s FTC and state regulators; it also includes both members and nonmembers of NRMLA. We selected seven advertisements that represented these claims and submitted them to the regulators for review. 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. 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. The six potentially misleading claims that we identified, and agency officials generally agreed raised concern, 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 was the most common of the potentially misleading statements we found in the marketing materials we reviewed. This claim was made by HUD itself in its instructions to approved HECM lenders; however, in December 2008, HUD issued guidance to HECM lenders explaining the inaccuracy of this claim. 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." "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). "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. Misrepresenting government affiliation: An example of this type of claim would include use of government symbols or logos and claims that imply that the lender is 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." 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. Therefore, the report we are issuing today recommends that HUD, FTC, and the federal banking regulators take steps to strengthen oversight and enhance industry and consumer awareness of the types of marketing claims discussed in this testimony. 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 certain annuity products may be suitable for some HECM borrowers, such as those who wish to receive payments for life regardless of where they live, there is concern that elderly reverse mortgage borrowers may be sold other 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. 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. However, with the passage of HERA, HUD now has responsibility for enforcing the cross-selling provisions in the legislation and is in the preliminary stages of developing regulations to implement them. The provisions are intended to curb the sale of unsuitable financial products to consumers using HECM funds. According to HUD officials, HUD is drafting a Federal Register notification to solicit feedback on issues concerning these provisions, including HUD's ability to monitor and enforce them; the usefulness of disclosures, education, and counseling in preventing cross-selling; what would constitute appropriate firewalls between a firm's reverse mortgage sales and sales of other financial products; and what types of financial products should be covered. HUD has also instructed 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. A number of state insurance regulators have reported cases of inappropriate cross-selling involving violations of state laws governing the sale of insurance and annuities. Many states have passed suitability laws that are designed to protect consumers from being sold unsuitable insurance products, including annuities. Of the 29 state insurance regulators that responded to questions we sent all states and the District of Columbia, 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. For example, 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. In another case, 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. HUD's internal controls for HECM counseling do not provide reasonable assurance of compliance with HUD requirements. HUD has a range of internal control mechanisms to help ensure that HECM counselors comply with counseling requirements. These controls include (1) counseling standards as set forth in regulations, mortgagee letters, and a counseling protocol; (2) a counselor training and examination program, and (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. Although federal standards encourage agencies to test the effectiveness of their internal controls, HUD has not done so for its controls for HECM counseling. Our independent evaluation of 15 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. For each session, we determined whether the counselors covered required topics, primarily those referenced in the counseling certificate. The certificate identifies or refers to counseling requirements originally set forth in statute, HUD regulations, or mortgagee letters. Our undercover counselees participated in telephone counseling sessions because HUD estimated that about 90 percent of all HECM counseling sessions were conducted by telephone. All but one of the counselors who conducted our counseling sessions were examination-certified by HUD to provide HECM counseling. 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, most counselors explained that the loan would become due and payable when no borrower lives on 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. However, despite certifying on the counseling certificate that they had covered all of the information HUD requires, all of the counselors omitted at least some required information. 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. 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 that do not need to be repaid until the house is sold for payment of taxes or making major repairs. The financial implications of entering into a HECM: Fourteen of the 15 counselors only partially met this requirement, and 1 completely did not meet the requirement, because they omitted information that HUD directs counselors to convey. For example, 6 of the counselors did not provide estimates of the maximum amount of funds that might be available to the counselee under the HECM payment plan options. A HUD official said that this information would help counselees understand how reverse mortgages would address their financial situations. Additionally, 14 counselors did not tell counselees that they could elect to have the loan provider withhold funds to pay property taxes and insurance. 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. Asking if a homeowner had signed a contract or agreement with an estate planning service: HUD implemented this requirement based on a statutory provision intended to protect HECM borrowers from paying excessive fees for third-party services of little or no value. 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. 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. However, 6 of the 15 counselors for our undercover sessions overstated the length of the counseling sessions on the counseling certificates. 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 another instance, the session lasted about 20 minutes, but the counselor recorded 30 minutes. These 4 sessions omitted much of the required information, particularly the discussion of options and various aspects of the financial implications of a HECM. The counselors for the remaining 2 sessions recorded the sessions as lasting 2 hours when 1 lasted 45 minutes, and the other 57 minutes. Another area of noncompliance we identified concerned the requirement that counseling agencies assess a client's ability to pay the counseling fee. 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 this determination by considering factors including, but not limited to, the client's income and debt obligations. While HUD guidance states that agencies may use "objective criteria" in assessing a client's ability to pay, the guidance does not specify what types of criteria are appropriate. 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 assess the counselee's ability to pay. For example, 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; and counselors for four other sessions, asked about the undercover counselees' income but not their debts. In the absence of clear guidance, similarly situated counselees could be treated differently, and those facing financial hardships might be paying for counseling when they should not have to. Because of the weaknesses in HUD's internal controls, some prospective borrowers may not be receiving the information necessary to make informed decisions about obtaining a HECM. Therefore, we are recommending that HUD take steps to improve the effectiveness of its internal controls, such as by verifying the content and length of HECM counseling sessions. In closing, HECMs can provide senior homeowners with multiple types of benefits, but borrowers may not always fully understand the complexities of the product's terms and costs. Thus, the types of marketing claims discussed in this report, as well as the potential for seniors to be sold unsuitable products with their HECM funds, are causes for concern, particularly in a market with potential for substantial growth. These factors underscore the need for improvements in HUD's controls over HECM counseling. Mr. Chairman, Ranking Member Martinez, and Members of the Special Committee, this concludes my prepared statement. I would be happy to respond to any questions that you may have at this time. For further information about this testimony, please contact Mathew J. Scire, Director, 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 statement. Individuals making key contributions to this testimony include Steven K. Westley (Assistant Director), Sonja J. Bensen, Christine A. Hodakievic, Winnie Tsen, and Barbara M. Roesmann. 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.

Reverse mortgages--a type of loan against the borrower's home that is available to seniors--are growing in popularity. These mortgages allow seniors to convert their home equity into flexible cash advances while living in their homes. 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) misleading HECM marketing, (2) the sale of potentially unsuitable products in conjunction with HECMs, and (3) the oversight of HECM counseling providers. This testimony is based on a GAO report being released today (GAO-09-606). While 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, the product is relatively complex and costly and the population it serves is vulnerable. GAO's work identified areas of consumer protection that require further attention, including the area of HECM marketing. Various federal agencies have responsibility 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. Consumers who have not been cautioned about such claims could pursue HECMs with misunderstandings about the product. To date, federal agencies have had a limited role in addressing concerns about the sale of potentially unsuitable insurance and other financial products in conjunction with HECMs (known as "inappropriate cross-selling"). States generally regulate insurance products, and 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 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 in the preliminary stages of developing regulations. 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 required information to prospective HECM borrowers, but 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 has increasingly relied on contractors to provide logistics support for weapon system maintenance. These logistics support arrangements have taken various forms. In fiscal year 1998, DOD directed the armed services to pursue logistics support "reengineering" efforts with contractors to achieve cost savings and improve efficiency. A 1999 DOD study identified 30 pilot programs to test logistics support concepts that placed greater reliance on the private sector. Some of the pilot programs involved performance-type arrangements that were subsequently converted to, or designated as, performance-based logistics contracts. DOD's Quadrennial Defense Review Report advocated the implementation of performance- based logistics, with appropriate metrics, to compress the supply chain by removing steps in the warehousing, distribution, and order fulfillment processes; reducing inventories; and reducing overhead costs while improving the readiness of major weapon systems and commodities. Over the last few years, DOD has issued guidance on the implementation of performance-based logistics. In November 2001, the Office of the Deputy Under Secretary of Defense issued guidance recommending that program managers conduct a sound business case analysis to decide whether they should implement performance-based logistics for new systems and major acquisitions for already fielded systems. In an August 2003 memorandum to the military departments, the Under Secretary of Defense (Acquisition, Technology and Logistics) stated that DOD should continue to increase its use of performance-based logistics acquisitions. On February 4, 2004, the Deputy Secretary of Defense (1) directed the Under Secretary of Defense (Acquisition, Technology and Logistics), in conjunction with the Under Secretary of Defense (Comptroller), to issue clear guidance on purchasing logistics support using performance criteria and (2) directed each service to provide a plan to aggressively implement performance-based logistics for current and planned weapon system platforms. Then, based on recommendations in our August 2004 report, the Under Secretary of Defense (Acquisition, Technology and Logistics) issued a memorandum reemphasizing that the use of this type of support strategy was intended to optimize weapon system availability while minimizing costs and the logistics footprint and may be applied to weapon systems, subsystems, and components. The memorandum also provided specific definitions of performance metrics to be used. DOD describes performance-based logistics as the process of (1) identifying a level of performance required by the warfighter and (2) negotiating a performance-based arrangement between the government and a contractor or government facility to provide long-term total system support for a weapon system at a fixed level of annual funding. Instead of buying spare parts, repairs, tools, and data in individual transactions, DOD program offices that use a performance-based logistics arrangement buy a predetermined level of performance that meets the warfighter's objectives. Although established performance measures should be tailored to reflect the unique circumstances of each performance-based logistics arrangement, the measures are expected to support five general objectives: (1) percentage of time that a weapon system is available for a mission (operational availability); (2) percentage of mission objectives met (operational reliability); (3) operating costs divided by a specified unit of measure (cost per unit usage); (4) size or presence of support required to deploy, sustain, or move a weapon system (logistics footprint); and (5) period of time that is acceptable between the demand or request for support and the satisfactory fulfillment of that request (logistics response time). Currently, a DOD task force is refining these objectives into DOD standard performance definitions to be used by program offices in every service when preparing performance-based logistics arrangements. DOD guidance recommends that program offices prepare a business case analysis prior to adopting a performance-based logistics approach to support a weapon system. The aim of the business case analysis is to justify the decision to enter into a performance-based logistics contract. The business case analysis is to include cost savings that are projected as a result of using a performance-based logistics approach and the assumptions used in developing the business case analysis. Furthermore, DOD guidance states that program offices should update their business case analyses at appropriate decision points when sufficient cost and performance data have been collected to validate the assumptions used in developing the business case analyses, including the costs of alternative approaches, projected cost savings, and expected performance levels. Further, GAO Internal Control Standards state that it is necessary to periodically review and validate the propriety and integrity of program performance measures and indicators. Also, actual performance data should be continually compared against expected or planned goals, and any difference should be analyzed. Additionally, management should have a monitoring strategy that emphasizes to program managers their responsibility for internal controls (i.e., to review and validate performance measures and indicators) and that includes a plan for periodic evaluation of control activities. DOD program offices could not demonstrate that their use of performance- based logistics arrangements had achieved cost savings and performance improvements because they had not updated their business case analysis as suggested by DOD guidance. Specifically, of the 15 DOD program offices, only 1 updated its business case analysis to validate assumptions concerning cost and performance. Other DOD program offices had not updated their business case analysis in part because they lacked reliable contractor cost and performance data. The program offices typically relied on cost and performance data generated by contractors' information systems without verifying that the data were sufficiently reliable to update the business case analysis. Two DOD agencies, DCMA and DCAA, have the capability to assist program offices in monitoring fixed-price performance- based contracts, verifying the reliability of contractors' information systems, and collecting cost and performance data. None of the 15 program offices included in our review could demonstrate that use of a performance-based logistics arrangement had achieved cost savings and performance improvements. Although an updated business case analysis based on actual cost and performance data might show that cost savings and performance improvements were being achieved, only 1 of the 15 program offices had updated its business case analysis consistent with DOD guidance. Of the 15 program offices, 11 had developed a business case analysis prior to entering into a performance- based logistics arrangement. In their analysis, these program offices projected that they would achieve significant cost savings. For example, an Army program office projected total cost savings of $508.5 million, and a Navy program office projected cost savings of $29.7 million. However, only the Navy's T-45 program office had subsequently updated its business case analysis consistent with DOD guidance to determine whether cost savings were being achieved. Realizing that the contractor was not meeting the aircraft availability performance measure, the program office reassessed its business case assumptions and found that costs per flying hour were higher than estimated because the aircraft was flying fewer hours than forecasted. As a result, the program office negotiated separate contracts for the airframes and engines, which resulted in estimated cost savings of $144 million over 5 years. Performance indicators tracked by the program offices showed that the contractors met or exceeded performance requirements. Of the 15 programs, 10 reported that performance levels exceeded contract requirements, and 5 reported that performance levels were meeting contract requirements. For example, an Army program office reported a weapon system availability rate of 99 percent, which is 7 percent higher than what was projected in the business case analysis. Similarly, a Navy program office reported a weapon system availability rate of 97 percent, which is 7 percent higher than projected. Despite the reported performance improvements, the program offices had not analyzed the performance data to validate the improvements and determine whether these improvements could be attributed directly to their use of performance-based logistics arrangements to support the weapon systems. In addition, we noted that program offices in the past reported they had also met or exceeded required levels of performance using other contractual arrangements for weapon system maintenance. Moreover, the DOD program offices reporting that performance levels were exceeding contract requirements under performance-based logistics arrangements had not determined the incremental costs associated with achieving these higher levels of performance. As a result, they had no way of knowing whether incremental costs outweighed the benefits derived from achieving performance levels in excess of requirements. Program officials did not follow DOD guidance to update and validate their business case analyses because they assumed that costs incurred under fixed-price performance-based logistics arrangements would always be lower than costs incurred under more traditional contracting arrangements, and several program officials cited a lack of reliable data needed to validate expected costs savings and improved performance. However, the experience of the T-45 program showed that it is possible for program offices to validate the assumptions in the business case analysis and to determine whether expected cost savings and performance improvements were achieved. There are also other benefits derived from validating the assumptions used in the business case analysis. Validation can provide a better understanding of costs associated with the repair and maintenance of weapon systems, ensure that proper performance metrics are in place to satisfy logistical demand, isolate incremental costs associated with achieving higher levels of performance, and make cost and performance data available for contract renegotiations in order to obtain the best value for the government. Furthermore, we did not find evidence that the Office of the Secretary of Defense had established procedures to monitor whether program offices were following its guidance to update their business case analyses. The results of these updates could be used by DOD to assess the implementation of performance-based logistics arrangements and evaluate the extent to which performance-based logistics arrangements are achieving expected benefits. DOD program offices included in our review stated that because of limitations in their own information systems, they typically relied on cost and performance data generated by the contractors' information systems to monitor performance-based logistics contracts. Program offices acknowledged limitations in their own information systems in providing reliable data to closely monitor contractor cost and performance. Existing systems are capable of collecting some cost and performance information on performance-based logistics contracts; however, according to program officials, the systems are not capturing sufficiently detailed cost and performance information for monitoring performance-based logistics contracts. Program officials told us they had more confidence in the accuracy and completeness of contractor systems than in their legacy systems. The program offices, however, had not determined whether the contractor-provided data were sufficiently reliable to update their business case analyses. As a result, the program offices did not have the reliable data they needed to validate the assumptions used in the business case analysis and to determine whether their performance-based logistics arrangements were achieving expected cost savings and improved performance. As we noted in a prior report on DOD's management of depot maintenance contracting, to reduce personnel and save costs, DOD decided to rely more on contractors to manage and oversee fixed-price contracts because these contracts are considered low risk. The contractor assumes most of the risks for fixed-priced contracts, with the government taking a more limited role in monitoring these contracts. In our prior work on defense contract management, we discussed the importance of monitoring contractors' systems to ensure the accuracy and completeness of information generated by these systems. In addition, during our review of the private sector's use of performance-based logistics, we noted that private-sector companies that use performance-based logistics contracts, whether fixed price or cost-plus, closely monitor cost and performance information to effectively manage their contracts. These companies said they rely on their own systems and personnel to verify the cost and quality of work performed by the contractor. The private sector takes this approach (1) to ensure that expected costs under the contracts are accurate and meet the company's reliability standards, (2) to validate the business case decision used to justify a performance-based logistics arrangement, and (3) to obtain the data necessary to renegotiate the contract. DCMA and DCAA have the capability to monitor contractor cost and performance, verify the reliability of contractor-provided data, and collect detailed cost and performance data. However, most of the DOD program offices we reviewed made limited use of these agencies' resources because they viewed fixed-price performance-based logistics contracts to be low risk compared with other types of contracts. Before a contract is awarded, DCMA can provide advice and service to help construct effective solicitations, identify potential risk, select the most capable contractors, and write contracts that meet the needs of DOD customers. After the contract is awarded, DCMA can monitor contractors' information systems to ensure that cost, performance, and delivery schedules are in compliance with the terms and conditions of the contracts. DCAA performs contract audits for DOD components and provides accounting and financial advisory services during contract negotiation and administration of contracts. DCMA and DCAA officials said that they have a greater role in monitoring cost information for cost-plus contracts because such contracts are considered high risk. According to DCMA and DCAA officials, their level of oversight is significantly less for fixed-priced contracts, including performance-based logistics arrangements, because DOD considers these contracts to be low risk, thereby diminishing the need for monitoring contractor performance. Without a request from program offices or specific contract clauses, DCMA and DCAA generally would not conduct periodic reviews or audits of fixed-price contracts to verify cost and performance information. DCMA and DCAA officials also said that in the past, monitoring fixed-price contracts was included in their workload, but because of a reduction in staff and streamlining of operations, they focused their efforts on contract areas that have the highest risk for cost growth. DCMA and DCAA officials said they would support increasing their role in monitoring fixed-price performance-based contracts depending on the availability of their resources. DOD is expanding its use of performance-based logistics as its preferred support strategy in support of weapon systems but has not yet demonstrated that this long-term support strategy is being effectively implemented DOD-wide. DOD guidance states that program offices, after entering into performance-based logistics arrangements, should update their original business case analysis using actual cost and performance data to validate their assumptions, but most of the program offices we reviewed had not followed this guidance, and the Office of the Secretary of Defense was not monitoring whether program offices were following the guidance. The program offices therefore could not substantiate that cost savings and performance improvements for weapon system support were being achieved through the use of performance-based logistics arrangements. Program offices also have lacked reliable cost and performance data needed to validate the results of performance-based logistics arrangements. Reliable data could be collected and analyzed by increasing oversight of these contracts with the assistance of DCMA and DCAA. To demonstrate that performance-based logistics arrangements are resulting in reduced costs and increased performance, and to improve oversight of performance-based logistics contracts, we recommend that the Secretary of Defense direct the Under Secretary of Defense (Acquisition, Technology and Logistics) to take the following two actions: 1. Reaffirm DOD guidance that program offices update their business case analyses following implementation of a performance-based logistics arrangement and develop procedures, in conjunction with the military services, to track whether program offices that enter into these arrangements validate their business case decisions consistent with DOD guidance. 2. Direct program offices to improve their monitoring of performance- based logistics arrangements by verifying the reliability of contractor cost and performance data. The program offices may wish to increase the role of DCMA and DCAA in overseeing performance-based logistics contracts. In commenting on a draft of this report, DOD concurred with our recommendations regarding the validation of business case decisions for performance-based logistics arrangements and verification of reliability of contractor data. While DOD was generally responsive to our recommendations, specific details on how DOD planned to validate and verify contractor data were not provided. Regarding our recommendation to reaffirm guidance and develop procedures to track whether program offices validate their business case decisions, DOD stated that the department will reaffirm DOD guidance on updating the business case analysis after implementing performance-based logistics arrangements and will work with the military services to develop procedures to track whether program offices validate their business case decisions consistent with DOD guidance. With regard to our second recommendation to direct program offices to verify the reliability of contractor cost and performance data, DOD stated that it will issue guidance on verifying the reliability of contractor cost and performance data. DOD did not provide specific information on what the guidance would include nor did it indicate whether it would increase the use of DCMA or DCAA to verify the reliability of contractor cost and performance data. DOD also provided technical comments, which we have incorporated as appropriate. To determine whether DOD could demonstrate that cost savings and improved performance were being achieved through the use of performance-based logistics arrangements, we collected and analyzed data on 15 weapon system programs identified by the Office of the Secretary of Defense and the military services as programs that have successfully used performance-based logistics arrangements. The 15 programs are listed in table 1. We reviewed DOD and service policies, procedures, and guidance related to the use of performance-based logistics and met with program officials to discuss how their performance-based logistics contracts were structured and managed and how these contracts were validated to ensure that cost savings and improved performance were being achieved as a result of using performance-based logistics. We also obtained and analyzed available documentation, including business case analyses, contracts, and related files. We did not assess the methodology program offices used to prepare their business case analyses or the quality of these analyses. We discussed with program officials the systems they used to monitor contractor cost and performance. We also interviewed officials from the Office of the Secretary of Defense and military department headquarters to discuss implementation of performance-based logistics, lessons learned, and the benefits derived from using performance-based logistics approaches and practices. To determine how private-sector companies ensure that cost and performance levels under a performance-based contract are as expected, we reviewed the information provided by seven companies identified in our prior report that used complex and costly equipment that had life-cycle management issues similar to military weapon systems, and outsourced some portion of their maintenance work under performance- based contracts. These seven companies consisted of six airline companies and one mining company. We contacted officials at DCMA and DCAA to determine those agencies' roles in monitoring the costs and performance of fixed-priced contracts, including performance-based logistics contracts, how audits are requested or initiated, and the procedures for reporting the results of the audits. We are sending this report to the Chairman and Ranking Minority Member, Senate Subcommittee on Readiness and Management Support, Committee on Armed Services. We will also send copies to the Under Secretary of Defense (Acquisition, Technology and Logistics). Copies of this report will be made 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 on the matters discussed in this report, please contact me at (202) 512-8412 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 II. William M. Solis (202) 512-8412 or [email protected]. In addition to the contact named above, Thomas Gosling, Assistant Director; Thom Barger; Judith Collins; Pamela Valentine; and Cheryl Weissman were major contributors to this report.

The Department of Defense (DOD) contracts with private sector companies to perform depot maintenance of weapon systems using performance-based logistics--that is, purchasing a defined level of performance over a defined time period at a fixed cost to the government. After implementing such contracts, program offices are to validate their efficacy using cost and performance data; DOD cannot otherwise ensure cost savings and improved performance are being achieved through the use of performance-based logistics. GAO was asked to review the implementation of performance-based logistics to determine whether DOD could demonstrate cost savings and improved responsiveness from these arrangements. In conducting its review, GAO analyzed the implementation of performance-based logistics arrangements for 15 weapon system programs. DOD program offices could not demonstrate that they have achieved cost savings or performance improvements through the use of performance-based logistics arrangements. Although DOD guidance on implementing these arrangements states program offices should update their business case analysis based on actual cost and performance data, only 1 of the 15 program offices included in GAO's review had performed such an update consistent with DOD guidance. In the single case where the program office had updated its business case analysis, it determined that the performance-based logistics contract did not result in expected cost savings and the weapon system did not meet established performance requirements. In general, program offices had not updated their business case analysis after entering into a performance-based logistics contract because they assumed that the costs for weapon system maintenance incurred under a fixed-price performance-based logistics contract would always be lower than costs under a more traditional contracting approach and because they lacked reliable cost and performance data needed to validate assumptions used. Furthermore, the Office of the Secretary of Defense has not established procedures to monitor program offices to ensure they follow guidance and update the business case analysis. Additionally, program officials said because of limitations in their own information systems, they typically relied on cost and performance data generated by the contractors' information systems to monitor performance-based logistics contracts. The program offices, however, had not determined whether contractor-provided data were sufficiently reliable to update their business case analysis. Although the Defense Contract Management Agency and the Defense Contract Audit Agency are most commonly used to monitor higher risk contracts, such as cost plus contracts, they are potential resources available to assist program offices in monitoring fixed-price performance-based contracts. In doing so, these DOD agencies have the capability to verify the reliability of contractors' information systems and collect cost and performance data needed to update their business case analysis. Until program offices follow DOD's guidance and update their business case analysis based on reliable cost and performance data, DOD cannot evaluate the extent to which performance-based logistics arrangements are achieving expected benefits and being effectively implemented within DOD.

The Social Security Act requires that most workers be covered by Social Security benefits. Workers contribute to the program via wage deductions. State and local government workers were originally excluded from Social Security. Starting in the 1950s, state and local governments had the option of selecting Social Security coverage for their employees or retaining their noncovered status. In 1983, state and local governments in the Social Security system were prohibited by law from opting out of it. Of the workers in the roughly 2,300 separate state and local retirement plans nationwide, about one-third are not covered by Social Security. In addition to paying retirement and disability benefits to covered workers, Social Security also generally pays benefits to spouses of retired, disabled, or deceased workers. If both spouses worked in positions covered by Social Security, each may not receive both the benefits earned as a worker and the full spousal benefit; rather the worker receives the higher amount of the two. In contrast, until 1977, workers receiving pensions from government positions not covered by Social Security could receive their full pension benefit and their full Social Security spousal benefits as if they were nonworking spouses. At that time, legislation was enacted creating the GPO, which prevented workers from receiving a full spousal benefit on top of a pension earned from noncovered government employment. However, the law provides an exemption from the GPO if an individual's last day of state/local employment is in a position that is covered by both Social Security and the state/local government's pension system. In these cases, the GPO will not be applied to the Social Security spousal benefit. While we could not definitively confirm the extent nationwide that individuals are transferring positions to avoid the GPO, we found that 4,819 individuals in Texas and Georgia had performed work in Social Security-covered positions for short periods to qualify for the GPO last-day exemption. Use of the exemption may grow further as the practice becomes more rapidly institutionalized and the aging baby-boom generation begins to retire in larger numbers. SSA officials also acknowledged that use of the exemption might be possible in some of the approximately 2,300 state and local government retirement plans in other states where such plans contain Social Security-covered and noncovered positions. Officials in Texas reported that 4,795 individuals at 31 schools have used or plan to use last-day employment to take advantage of the GPO exemption. In 2002, one-fourth (or 3,521) of all Texas public education retirees took advantage of this exemption. In most schools, teachers typically worked a single day in a nonteaching position covered by Social Security to use the exemption. Nearly all positions were nonteaching jobs, including clerical, food service, or maintenance. Most of these employees were paid about $6 per hour. At this rate, the Social Security contributions deducted from their pay would total about $3 for the day. We estimate that the average annual spousal benefit resulting from these last-day transfers would be about $5,200. School officials also reported that individuals are willing to travel to take these jobs--noting one teacher who traveled 800 miles to use the last-day provision. Some schools reported that they charge a processing fee, ranging from $100-$500, to hire these workers. These fees are a significant source of revenue--last year one school district collected over $283,000 in fees. Our work shows that use of the exemption in Texas has increased since 1990, which was the earliest use reported to us. In one school district, for example, officials reported that use of the exemption grew from one worker in 1996 to 1,050 in 2002. Another school district that began offering last-day employment in 2002 had received over 1,400 applications by June of that year from individuals seeking to use the exemption. Use of the exemption is likely to grow further, according to trends in Texas teacher retirements and information from school officials. There were about 14,000 teacher retirements in 2002, as opposed to 10,000 in 2000. At one university we visited, officials have scheduled workdays for imminent retirees, through 2005, to work in covered employment, an indication of the rapid institutionalization of this practice. The GPO exemption is also becoming part of teachers' regular retirement planning process as its availability and use is publicized by teaching associations and financial planners (via Web sites, newspapers, seminars, etc.) and by word-of-mouth. One association's Web site we identified lists the names and telephone numbers of school officials in counties covered by Social Security and how to contact those officials for such work. A financial planner's Web site we identified indicated that individuals who worked as little as 1 day under a Social Security-covered position to quality for the GPO exemption could earn $150,000 or more in benefits over their lifetime. In Georgia, officials in one district reported that 24 individuals have used or plan to use covered employment to take advantage of the GPO exemption. Officials told us that teachers generally agreed to work for approximately 1 year in another teaching position in a school district covered by Social Security to use the GPO exemption. These officials told us that they expect use of the exemption to increase as awareness of it grows. According to Georgia officials, their need to address a teacher shortage outweighs the risk to individual schools of teachers leaving after 1 year. Officials in fast-growing school systems reported they needed to hire teachers even if they only intended to teach for 1 year. However, some schools reported that they have had teachers leave shortly after being hired. For example, in one district, a teacher signed a 1-year contract to teach but left after 61 days, a time sufficient to avoid the spousal benefit reduction. In some of the applications for school employment we reviewed, individuals explicitly indicated their desire to work in a county covered by Social Security in order to obtain full Social Security spousal benefits. Use of the GPO exemption might be possible in other plans nationwide. SSA officials told us that some of the approximately 2,300 state and local government retirement plans--where such plans contain Social Security- covered and noncovered positions--may offer individuals the opportunity to use the GPO exemption. Officials representing state and local government retirement plans in other states across the country also told us that their plans allow covered and noncovered Social Security positions, making it possible for workers to avoid the GPO by transferring from one type of position to the other. For example: An official in a midwestern state whose plan covers all state government employees, told us that it is possible for law enforcement personnel (noncovered) to take a covered job in the state insurance bureau (covered) just before retiring. In a southern state with a statewide retirement plan for school employees, teachers and other school professionals (noncovered) can potentially transfer to a job in the school cafeteria (covered) to avoid the GPO. A retirement system official from a north central state reported hearing of a few cases where teachers had taken advantage of the exemption by transferring to jobs in other school districts covered by Social Security. Finally, in a western state with a statewide retirement plan, workers could move from one government agency (noncovered) to a position in another agency (covered). The transfers to avoid the GPO we identified in Texas and Georgia could increase long-term benefit payments from the Social Security Trust Fund by about $450 million. We calculated this figure by multiplying the number of last-day cases reported in Texas and Georgia (4,819) by SSA data on the average annual offset amount ($4,800) and the average retirees life expectancy upon receipt of spousal benefits (19.4 years). We believe that these estimated payments would likely increase as use of the exemption grows. Our prior report identified two options for addressing potential abuses of the GPO exemption. The first option, as proposed in H.R. 743, is to change the last-day provision to a longer minimum time period. This option would require only small changes to administer and would be less burdensome than other methods for SSA to administer. Also, this option has precedent. Legislation in 1987 required federal employees transferring between two federal retirement systems, the Civil Service Retirement System (CSRS) and Federal Employees Retirement System (FERS), to remain in FERS for 5 years before they were exempt from the GPO. We found that most of the jobs in Texas last for about 1 day, so extending the time period might eliminate many of the exemption users in Texas. The second option our report identified is to use a proportional approach to determine the extent to which the GPO applies. Under this option, employees who have spent a certain proportion of their working career in a position covered by Social Security could be exempt from the GPO. This option may represent a more calibrated approach to determining benefits for individuals who have made contributions to the Social Security system for an extended period of their working years. However, SSA has noted that using a proportional approach would take time to design and would be administratively burdensome to implement, given the lack of complete and reliable data on noncovered Social Security employment. The GPO "loophole" raises fairness and equity concerns for those receiving a Social Security pension and currently subject to an offset of their spousal Social Security benefits. The exemption allows a select group of individuals with a relatively small investment of work time and only minimal Social Security contributions to gain access to potentially many years of full Social Security spousal benefits. The practice of providing full spousal benefits to individuals who receive government pensions but who made only nominal contributions to the Social Security system also runs counter to the nation's efforts to address the solvency and sustainability of the Social Security program. Based on the number of people reported to be using the loophole in Texas and Georgia this year, the exemption could cost the Trust Fund hundreds of millions of dollars. While this currently represents a relatively small percentage of the Social Security Trust Fund, costs could increase significantly if the practice grows and begins to be adopted by other states and localities. Considering the potential for abuse of the last-day exemption and the likelihood for its increased use, we believe timely action is needed. Accordingly, our August 2002 report includes a Matter for Congressional consideration that the last-day GPO exemption be revised to provide for a longer minimum time period. This action would provide an immediate "fix" to address possible abuses of the GPO exemption identified in our review. 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 information regarding this testimony, please contact Barbara D. Bovbjerg, Director, Education, Workforce, and Income Security Issues, on (202) 512-7215. Individuals who made key contributions to this testimony include Daniel Bertoni, Patrick DiBattista, Patricia M. Bundy, Jamila L. Jones, Daniel A. Schwimer, Anthony J. Wysocki, and Jill D. Yost.

The Government Pension Offset (GPO) exemption was enacted in 1977 to equalize the treatment of workers covered by Social Security and those with government pensions not covered by Social Security. Congress asked GAO to (1) assess the extent to which individuals retiring from jobs not covered by Social Security may be transferring briefly to covered jobs in order to avoid the GPO, and (2) estimate the impact of such transfers on the Social Security Trust Fund. Because no central data exists on use of the GPO exemption by individuals in approximately 2,300 state and local government retirement plans nationwide, GAO could not definitively confirm that this practice is occuring in states other than Texas and Georgia. In those two states, 4,819 individuals had performed work in Social Security-covered positions for short periods to qualify for the GPO last-day exemption. In Texas, teachers typically worked a single day in nontechnical positions covered by Social Security, such as clerical or janitorial positions. In Georgia, teachers generally agreed to work for approximately 1 year in another teaching position in a school district covered by Social Security. Officials in both states indicated that use of the exemption would likely continue to grow as awareness increases and it becomes part of individuals' retirement planning. For the cases GAO identified, increased long-term benefit payments from the Social Security Trust Fund could be $450 million over the long term and would likely rise further if use of the exemption grows in the states GAO visited and spreads to others. SSA officials acknowledged that use of the exemption might be possible in other state and local government retirement plans that include both those positions covered by Social Security and those not. The GPO "loophole" raises fairness and equity concerns for those receiving a Social Security pension and are currently subject to the spousal benefit offset. In the states we visited, individuals with a relatively minimal investment of work time and Social Security contributions can gain access to potentially many years of full Social Security spousal benefits. The last-day exemption could also have a more significant impact if the practice grows and begins to be adopted by other states and localities. Considering the potential for abuse, our report presented options for revising the GPO exemption, such as changing the last-day provision to a longer minimum time period or using a proportional approach based on the number of working years spent in covered and noncovered employment for determining the extent to which the GPO applies.

In their efforts to modernize their health information systems and share medical information, VA and DOD start from different positions. As shown in table 1, VA has one integrated medical information system--the Veterans Health Information Systems and Technology Architecture (VistA)--which uses all electronic records. All 128 VA medical sites thus have access to all VistA information. (Table 1 also shows, for completeness, VA's planned modernized system and its associated data repository.) In contrast, DOD has multiple medical information systems (table 2 illustrates certain selected systems). DOD's various systems are not integrated, and its 138 sites do not necessarily communicate with each other. In addition, not all of DOD's medical information is electronic: some records are paper-based. For nearly a decade, VA and DOD have been undertaking initiatives to exchange data between their health information systems and create comprehensive electronic records. However, the departments have faced considerable challenges in project planning and management, leading to repeated changes in the focus and target completion dates of the initiatives. As shown in figure 1, the departments' efforts have involved both long- term initiatives to modernize their health information systems and short- term initiatives to respond to more immediate information-sharing needs. The departments' first initiative was the Government Computer-Based Patient Record (GCPR) project, which aimed to develop an electronic interface that would allow physicians and other authorized users at VA and DOD health facilities to access data from each other's health information systems. The interface was expected to compile requested patient information in a virtual record (that is, electronic as opposed to paper) that could be displayed on a user's computer screen. We reviewed the GCPR project in 2001 and 2002, noting disappointing progress exacerbated in large part by inadequate accountability and poor planning and oversight, which raised questions about the departments' abilities to achieve a virtual medical record. We determined that the lack of a lead entity, clear mission, and detailed planning to achieve that mission made it difficult to monitor progress, identify project risks, and develop appropriate contingency plans. In both years, we recommended that the departments enhance the project's overall management and accountability. In particular, we recommended that the departments designate a lead entity and a clear line of authority for the project; create comprehensive and coordinated plans that include an agreed-upon mission and clear goals, objectives, and performance measures; revise the project's original goals and objectives to align with the current strategy; commit the executive support necessary to adequately manage the project; and ensure that it followed sound project management principles. In response, by July 2002, the two departments had revised their strategy, refocusing the project and dividing it into two initiatives. A short-term initiative, the Federal Health Information Exchange (FHIE), was to enable DOD to electronically transfer service members' health information to VA when the members left active duty. VA was designated as the lead entity for implementing FHIE, which was completed in 2004. A longer-term initiative was to develop a common health information architecture that would allow a two-way exchange of health information. The common architecture is to include standardized, computable data, communications, security, and high-performance health information systems (these systems, DOD's Composite Health Care System II and VA's HealtheVet VistA, were already in development, as shown in the figure). The departments' modernized systems are to store information (in standardized, computable form) in separate data repositories: DOD's Clinical Data Repository (CDR) and VA's Health Data Repository (HDR). The two repositories are to exchange information through an interface named CHDR. In March 2004, the departments began to develop the CHDR interface. They planned to begin implementation by October 2005; however, implementation of the first release of the interface (at one site) occurred in September 2006, almost a year beyond the target date. In a report in June 2004, we identified a number of management weaknesses that could have contributed to this delay and made a number of recommendations, including creation of a comprehensive and coordinated project management plan. The departments agreed with our recommendations and took steps to improve the management of the CHDR initiative, designating a lead entity with final decision-making authority and establishing a project management structure. However, as we noted in subsequent testimony, the initiative did not have a detailed project management plan that described the technical and managerial processes necessary to satisfy project requirements (including a work breakdown structure and schedule for all development, testing, and implementation tasks), as we had recommended. In October 2004, responding to a congressional mandate, the departments established two more short-term initiatives: the Laboratory Data Sharing Interface, aimed at allowing VA and DOD facilities to share laboratory resources, and the Bidirectional Health Information Exchange (BHIE), aimed at giving both departments' clinicians access to records on shared patients (that is, those who receive care from both departments). As demonstration projects, these initiatives were limited in scope, with the intention of providing interim solutions to the departments' needs for more immediate health information sharing. However, because BHIE provided access to up-to-date information, the departments' clinicians expressed strong interest in expanding its use. As a result, the departments began planning to broaden this capability and expand its implementation considerably. Extending BHIE connectivity could provide each department with access to most data in the other's legacy systems, until such time as the departments' modernized systems are fully developed and implemented. According to a VA/DOD annual report and program officials, the departments now consider BHIE an interim step in their overall strategy to create a two-way exchange of electronic medical records. The departments' reported costs for the various sharing initiatives and the modernization of their health information systems through fiscal year 2007 are shown in table 3. Beyond these initiatives, in January 2007, the departments announced a further change to their information-sharing strategy: their intention to jointly develop a new inpatient medical record system. On July 31, 2007, they awarded a contract for a feasibility study. According to the departments, adopting this joint solution is expected to facilitate the seamless transition of active-duty service members to veteran status, and make inpatient health care data on shared patients immediately accessible to both DOD and VA. In addition, the departments believe that a joint development effort could enable them to realize significant cost savings. We have not evaluated the departments' plans or strategy for this new system. Throughout the history of these initiatives, evaluations besides our own have found deficiencies in the departments' efforts, especially with regard to the lack of comprehensive planning. For example, a recent presidential task force identified the need for VA and DOD to improve their long-term planning. This task force, reporting on gaps in services provided to returning veterans, noted problems in sharing information on wounded service members, including the inability of VA providers to access paper DOD inpatient health records. The task force stated that although significant progress has been made towards sharing electronic information, more needs to be done, and recommended that VA and DOD continue to identify long-term initiatives and define the scope and elements of a joint inpatient electronic health record. In addition, in fiscal year 2006, Congress did not provide all the funding requested for HealtheVet VistA because it did not consider that the funding had been adequately justified. VA and DOD have made progress in both their long-term and short-term initiatives to share health information. In the long-term project to modernize their health information systems, the departments have begun, among other things, to implement the first release of the interface between their modernized data repositories. The departments have also made progress in their short-term projects to share information in existing systems, having completed two initiatives, and are making important progress on another. In addition, the departments have undertaken ad hoc activities to accelerate the transmission of health information on severely wounded patients from DOD to VA's four polytrauma centers. However, despite the progress made and the sharing achieved, the tasks remaining to reach the goal of a shared electronic medical record are substantial. In their long-term effort to share health information, VA and DOD have completed the development of their modernized data repositories, agreed on standards for various types of data, and begun to populate the repositories with these data. In addition, they have now implemented the first release of the CHDR interface. According to the departments' officials, all DOD sites can now access the interface, and it is expected to be available across VA when necessary software updates are released. (Currently 103 of 128 VA sites have received these updates.) At 7 sites, VA and DOD are now exchanging limited medical information for shared patients: specifically, computable outpatient pharmacy and drug allergy information. CHDR is the conduit for exchanging computable medical information between the departments. Data transmitted via the interface are permanently stored in each department's new data repository, CDR, and HDR. Once in the repositories, these computable data can be used by DOD and VA at all sites through their existing systems. CHDR also provides terminology mediation (translation of one agency's terminology into the other's). The departments' plans call for further developing the capability to exchange computable laboratory results data through the interface during fiscal year 2008. Although implementing this interface is an important accomplishment, the departments are still a long way from completing the modernized health information systems and comprehensive longitudinal health records. While DOD and VA had originally projected completion dates of 2011 and 2012, respectively, for their modernized systems, the departments' officials told us that there is currently no scheduled completion date for either system. VA is evaluating a proposal that would result in completion of its system in 2015; DOD is evaluating the impact of the new study on a joint inpatient medical record and has not indicated a new completion date. Further, both departments have still to identify the next types of data to be stored in the repositories. The departments will then have to populate the repositories with the standardized data. This involves different tasks for each department. Specifically, while VA's medical records are already electronic, it must still convert them into the interoperable format appropriate for its repository. DOD, in addition to converting current records from its multiple systems, must also address medical records that are not automated. As pointed out by a recent Army Inspector General's report, some DOD facilities are having problems with hard copy records. The report also identified inaccurate and incomplete health data as a problem to be addressed. Before the departments can achieve the long- term goal of seamless sharing of medical information, all of these tasks and challenges will have to be addressed. Accordingly, it is essential that the departments develop a comprehensive project plan to guide these efforts to completion, as we have previously recommended. In addition to the long-term effort previously described, the two departments have made some progress in meeting immediate needs to share information in their respective legacy systems through short-term projects which, as mentioned earlier, are in various stages of completion. They have also set up special processes to transfer data from DOD facilities to VA's polytrauma centers in a further effort to more effectively treat traumatic brain injuries and other especially severe injuries. DOD has been using FHIE to transfer information to VA since 2002. According to DOD officials, 194 million clinical messages on more than 4 million veterans had been transferred to the FHIE data repository as of September 2007, including laboratory results, radiology results, outpatient pharmacy data, allergy information, consultation reports, elements of the standard ambulatory data record, and demographic data. Further, since July 2005, FHIE has been used to transfer pre- and post-deployment health assessment and reassessment data; as of September 2007, VA had access to data for more than 793,000 separated service members and demobilized Reserve and National Guard members who had been deployed. Transfers are done in batches once a month, or weekly for veterans who have been referred to VA treatment facilities. According to a joint VA/DOD report, FHIE has made a significant contribution to the delivery and continuity of care of separated service members as they transition to veteran status, as well as to the adjudication of disability claims. One of the departments' demonstration projects--the Laboratory Data Sharing Interface (LDSI)--is now fully operational and is deployed when local agencies have a business case for its use and sign an agreement. It requires customization for each locality and is currently deployed at nine locations. LDSI currently supports a variety of chemistry and hematology tests, and, at one of the nine locations, anatomic pathology and microbiology tests. Once LDSI is implemented at a facility, the only nonautomated action needed for a laboratory test is transporting the specimens. If a test is not performed at a VA or DOD doctor's home facility, the doctor can order the test, the order is transmitted electronically to the appropriate lab (the other department's facility or in some cases a local commercial lab), and the results are returned electronically. Among the benefits of the LDSI interface, according to VA and DOD, are increased speed in receiving laboratory results and decreased errors from manual entry of orders. The LDSI project manager in San Antonio stated that another benefit of the project is the time saved by eliminating the need to rekey orders at processing labs to input the information into the laboratories' systems. Additionally, the San Antonio VA facility no longer has to contract out some of its laboratory work to private companies, but instead uses the DOD laboratory. Developed under a second demonstration project, the BHIE interface permits a medical care provider to query selected health information on patients from all VA and DOD sites and to view that data onscreen almost immediately. It not only allows the two departments to view each other's information, but it also allows DOD sites to see previously inaccessible data at other DOD sites. VA and DOD have been making progress on expanding the BHIE interface. As initially developed, the interface provided access to information in VA's VistA and DOD's Composite Health Care System, but it is currently being expanded to query data in other DOD systems and databases. In particular, the interface has been expanded to DOD's: Modernized data repository, CDR, which has enabled department-wide access to outpatient data for pharmacy and inpatient and outpatient allergy, radiology, chemistry, and hematology data since July 2007, and to microbiology data since September 2007. Clinical Information System (CIS), an inpatient system used by some DOD facilities; the interface enables bidirectional views of discharge summaries and is currently deployed at 13 large DOD sites. Theater Medical Data Store, which became operational in October 2007, enabling access to inpatient and outpatient clinical information from combat theaters. The departments are also taking steps to make more data elements available through BHIE. VA and DOD staff told us that by the end of the first quarter of fiscal year 2008, they plan to add provider notes, procedures, and problem lists. Later in fiscal year 2008, they plan to add vital signs, scanned images and documents, family history, social history, and other history questionnaires. In addition, a VA/DOD demonstration site in El Paso began sharing radiological images between the VA and DOD facilities in September 2007 using the BHIE/FHIE infrastructure. Although VA and DOD are sharing various types of health data, the type of data being shared has been limited and significant work remains to expand the data shared and integrate the various initiatives. Table 4 summarizes the types of health data currently shared via the long- and short-term initiatives we have described, as well as additional types of data that are currently planned for sharing. While this gives some indication of the scale of the tasks involved in sharing medical information, it does not depict the full extent of information that is currently being captured in the health information systems at VA and DOD. In addition to the information technology initiatives described, DOD and VA have set up special procedures to transfer medical information to VA's four polytrauma centers, which treat active duty service members and veterans severely wounded in combat. Some examples of polytrauma include traumatic brain injury, amputations, and loss of hearing or vision. When service members are seriously injured in a combat theater overseas, they are first treated locally. They are then generally evacuated to Landstuhl Medical Center in Germany, after which they are transferred to a military treatment facility in the United States, usually Walter Reed Army Medical Center in Washington, D.C.; the National Naval Medical Center in Bethesda, Maryland; or Brooke Army Medical Center, at Fort Sam Houston, Texas. From these facilities, service members suffering from polytrauma may be transferred to one of VA's four polytrauma centers for treatment. At each of these locations, the injured service members will accumulate medical records, in addition to medical records already in existence before they were injured. According to DOD officials, when patients are referred to VA for care, DOD sends copies of medical records documenting treatment provided by the referring DOD facility along with them. The DOD medical information is currently collected in several different systems: 1. In the combat theater, electronic medical information may be collected for a variety of reasons, including routine outpatient care, as well as serious injuries. These data are stored in the Theater Medical Data Store. As mentioned earlier, the BHIE interface to this database became operational in October. 2. At Landstuhl, inpatient medical records are paper-based (except for discharge summaries). The paper records are sent with a patient as the individual is transferred for treatment in the United States. DOD officials told us that the paper record is the official DOD medical record, although AHLTA is used extensively to provide outpatient encounter information for medical records purposes. 3. At the DOD treatment facility (Walter Reed, Bethesda, or Brooke), additional inpatient information is recorded in CIS and outpatient pharmacy and drug information are stored in CDR; other health information continues to be stored in local CHCS databases. When service members are transferred to a VA polytrauma center, VA and DOD have several ad hoc processes in place to electronically transfer the patients' medical information: DOD has set up secure links to enable a limited number of clinicians at the polytrauma centers to log directly into CIS at Walter Reed and Bethesda Naval Hospital to access patient data. Staff at Walter Reed, Brooke, and Bethesda medical centers collect paper records, print records from CIS, scan all these, and transmit the scanned data to the four polytrauma centers. DOD staff pointed out that this laborious process is feasible only because the number of polytrauma patients is small. According to VA officials, 460 severe traumatic brain injury patients had been treated at the polytrauma centers through fiscal year 2007. According to DOD officials, the medical records for 81 patients planned for transfer or already at a VA polytrauma center were scanned and provided to VA between April 1 and October 11 of this year. Digital radiology images were also provided for 48 patients. Staff at Walter Reed and Bethesda are transmitting radiology images electronically to the four polytrauma centers. Access to radiology images is a high priority for polytrauma center doctors, but like scanning paper records, transmitting these images requires manual intervention: when each image is received at VA, it must be individually uploaded to VistA's imagery viewing capability. This process would not be practical for large volumes of images. VA has access to outpatient data (via BHIE) from all DOD sites, including Landstuhl. These special efforts to transfer medical information on seriously wounded patients represent important additional steps to facilitate the sharing of information that is vital to providing polytrauma patients with quality health care. In summary, VA and DOD are exchanging health information via their long- and short-term initiatives and continue to expand sharing of medical information via BHIE. However, these exchanges have been limited, and significant work remains to fully achieve the goal of exchanging interoperable, computable data. Work still to be done includes agreeing to standards for the remaining categories of medical information; populating the data repositories with all this information; completing the development of HealtheVet VistA, and AHLTA; and transitioning from the legacy systems. To complete this work and achieve the departments' ultimate goal of a maintaining a lifelong electronic medical record that will follow service members as they transition from active to veteran status, a comprehensive and coordinated project management plan that defines the technical and managerial processes necessary to satisfy project requirements and to guide their activities continues to be of vital importance. We have previously recommended that the departments develop such a plan and that it include a work breakdown structure and schedule for all development, testing, and implementation tasks. Without such a detailed plan, VA and DOD increase the risk that the long-term project will not deliver the planned capabilities in the time and at the cost expected. Further, it is not clear how all the initiatives we have described today are to be incorporated into an overall strategy toward achieving the departments' goal of a comprehensive, seamless exchange of health information. This concludes my statement. I would be pleased to respond to any questions that you may have. If you have any questions concerning this testimony, please contact Valerie C. Melvin, Director, Human Capital and Management Information Systems Issues, at (202) 512-6304 or [email protected]. Other individuals who made key contributions to this testimony are Barbara Oliver (Assistant Director), Nancy Glover, Glenn Spiegel, and Amos Tevelow. Computer-Based Patient Records: Better Planning and Oversight by VA, DOD, and IHS Would Enhance Health Data Sharing. GAO-01-459. Washington, D.C.: April 30, 2001. Veterans Affairs: Sustained Management Attention Is Key to Achieving Information Technology Results. GAO-02-703. Washington, D.C.: June 12, 2002. Computer-Based Patient Records: Short-Term Progress Made, but Much Work Remains to Achieve a Two-Way Data Exchange Between VA and DOD Health Systems. GAO-04-271T. Washington, D.C.: November 19, 2003. Computer-Based Patient Records: Sound Planning and Project Management Are Needed to Achieve a Two-Way Exchange of VA and DOD Health Data. GAO-04-402T. Washington, D.C.: March 17, 2004. Computer-Based Patient Records: VA and DOD Efforts to Exchange Health Data Could Benefit from Improved Planning and Project Management. GAO-04-687. Washington, D.C.: June 7, 2004. Computer-Based Patient Records: VA and DOD Made Progress, but Much Work Remains to Fully Share Medical Information. GAO-05-1051T. Washington, D.C.: September 28, 2005. Information Technology: VA and DOD Face Challenges in Completing Key Efforts. GAO-06-905T. Washington, D.C.: June 22, 2006. DOD and VA Exchange of Computable Pharmacy Data. GAO-07-554R. Washington, D.C.: April 30, 2007. Information Technology: VA and DOD Are Making Progress in Sharing Medical Information, but Are Far from Comprehensive Electronic Medical Records, GAO-07-852T. Washington, D.C.: May 8, 2007. Information Technology: VA and DOD Are Making Progress in Sharing Medical Information, but Remain Far from Having Comprehensive Electronic Medical Records, GAO-07-1108T. Washington, D.C.: July 18, 2007. 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 Department of Veterans Affairs (VA) and the Department of Defense (DOD) are engaged in ongoing efforts to share medical information, which is important in helping to ensure high-quality health care for active-duty military personnel and veterans. These efforts include a long-term program to develop modernized health information systems based on computable data: that is, data in a format that a computer application can act on--for example, to provide alerts to clinicians of drug allergies. In addition, the departments are engaged in short-term initiatives involving existing systems. GAO was asked to testify on the history and current status of the departments' efforts to share health information. To develop this testimony, GAO reviewed its previous work, analyzed documents about current status and future plans and interviewed VA and DOD officials. For almost a decade, VA and DOD have been pursuing ways to share health information and to create comprehensive electronic medical records. However, they have faced considerable challenges in these efforts, leading to repeated changes in the focus of their initiatives and target completion dates. Currently, the two departments are pursuing both long- and short-term initiatives to share health information. Under their long-term initiative, the modern health information systems being developed by each department are to share standardized computable data through an interface between data repositories associated with each system. The repositories have now been developed, and the departments have begun to populate them with limited types of health information. In addition, the interface between the repositories has been implemented at seven VA and DOD sites, allowing computable outpatient pharmacy and drug allergy data to be exchanged. Implementing this interface is a milestone toward the departments' long-term goal, but more remains to be done. Besides extending the current capability throughout VA and DOD, the departments must still agree to standards for the remaining categories of medical information, populate the data repositories with this information, complete the development of the two modernized health information systems, and transition from their existing systems. While pursuing their long-term effort to develop modernized systems, the two departments have also been working to share information in their existing systems. Among various short-term initiatives are a completed effort to allow the one-way transfer of health information from DOD to VA when service members leave the military, as well as ongoing demonstration projects to exchange limited data at selected sites. One of these projects, which builds on the one-way transfer capability, developed an interface between certain existing systems that allows a two-way view of current data on patients receiving care from both departments. VA and DOD are now expanding the sharing of additional medical information by using this interface to link other systems and databases. The departments have also established ad hoc processes to meet the immediate need to provide data on severely wounded service members to VA's polytrauma centers, which specialize in treating such patients. These processes include manual workarounds (such as scanning paper records) that are generally feasible only because the number of polytrauma patients is small. While these multiple initiatives and ad hoc processes have facilitated degrees of data sharing, they nonetheless highlight the need for continued efforts to integrate information systems and automate information exchange. At present, it is not clear how all the initiatives are to be incorporated into an overall strategy focused on achieving the departments' goal of comprehensive, seamless exchange of health information.

GAO has been assessing strategic sourcing and the potential value of applying these techniques to federal acquisitions for more than a decade. In 2002, GAO reported that leading companies of that time committed to a strategic approach to acquiring services--a process that moves a company away from numerous individual procurements to a broader aggregate approach--including developing knowledge of how much they were spending on services and taking an enterprise-wide approach to As a result, companies made structural changes services acquisition.with top leadership support, such as establishing commodity managers-- responsible for purchasing services within a category--and were better able to leverage their buying power to achieve substantial savings. Strategic sourcing can encompass a range of tactics for acquiring products and services more effectively and efficiently. In addition to leveraged buying, tactics include managing demand by changing behavior, achieving efficiencies through standardization of the acquisition process, evaluating total cost of ownership, and better managing supplier relationships. We have particularly emphasized the importance of comprehensive spend analysis for efficient procurement since 2002. Spend analysis provides knowledge about how much is being spent for goods and services, who the buyers are, who the suppliers are, and where the opportunities are to save money and improve performance. Private sector companies are using spend analysis as a foundation for employing a strategic approach to procurement. We have previously reported that because procurement at federal departments and agencies is generally decentralized, the federal government is not fully leveraging its aggregate buying power to obtain the most advantageous terms and conditions for its procurements. Agencies act more like many unrelated, medium-sized businesses and often rely on hundreds of separate contracts for many commonly used items, with prices that vary widely. Recognizing the benefits of strategic sourcing, the Office of Management and Budget (OMB) issued a memorandum in 2005 that implemented strategic sourcing practices. Agencies were directed to develop and implement strategic sourcing efforts based on the results of spend analyses. In addition to individual agency efforts, a government-wide strategic sourcing program--known as the Federal Strategic Sourcing Initiative (FSSI)--was established in 2005. FSSI was created to address government-wide opportunities to strategically source commonly purchased products and services and eliminate duplication of efforts across agencies. The FSSI mission is to encourage agencies to aggregate requirements, streamline processes, and coordinate purchases of like products and services to leverage spending to the maximum extent possible. At the time of our 2012 report, four FSSI efforts were ongoing-- focused on office supplies, domestic delivery of packages, telecommunications, and print management--and three were planned related to SmartBUY, Wireless plans and devices, and publication licenses. In our September 2012 report, we found that most of the agencies we reviewed leveraged a fraction of their buying power through strategic sourcing. More specifically, in fiscal year 2011, the Department of Defense (DOD), Department of Homeland Security (DHS), Department of Energy, and Department of Veterans Affairs (VA) accounted for 80 percent of the $537 billion in federal procurement spending, but reported managing about 5 percent of that spending, or $25.8 billion, through strategic sourcing efforts. Similarly, we found that the FSSI program had only managed a small amount of spending through its four government- wide strategic sourcing initiatives in fiscal year 2011, although it reported achieving significant savings on those efforts. Further, we found that most selected agencies' efforts did not address their highest spending areas, such as services, which provides opportunities for significant savings. We found that when strategically sourced contracts were used, agencies generally reported achieving savings. For example, selected agencies generally reported savings ranging from 5 percent to over 20 percent of spending through strategically sourced contracts. In fiscal year 2011, DHS reported managing 20 percent of its spending and achieving savings of $324 million. At the government-wide level, the FSSI program reported managing $339 million through several government-wide initiatives in fiscal year 2011 and achieving $60 million in savings, or almost 18 percent of the procurement spending it managed through these initiatives. After strategic sourcing contracts are awarded, realizing cost savings and other benefits depends on utilization of these contracts. We found that only 15 percent of government-wide spending for the products and services covered by the FSSI program went through FSSI contracts in fiscal year 2011. Agencies cited a variety of reasons for not participating, such as wanting to maintain control over their contracting activities, or because the agency had unique requirements. FSSI use is not mandatory and agencies face no consequences for not using FSSI contract vehicles. There are a variety of impediments to strategic sourcing in the federal setting but several stood out prominently in our 2012 review.agencies faced challenges in obtaining and analyzing reliable and detailed data on spending as well as securing expertise, leadership support, and developing metrics. Data: Our reports have consistently found that the starting point for strategic sourcing efforts is having good data on current spending and yet this is the biggest stumbling block for agencies. A spending analysis reveals how much is spent each year, what was bought, from whom it was bought, and who was purchasing it. The analysis also identifies where numerous suppliers are providing similar goods and services--often at varying prices--and where purchasing costs can be reduced and performance improved by better leveraging buying power and reducing the number of suppliers to meet needs. The FSSI program and selected agencies generally cited the Federal Procurement Data System-Next Generation (FPDS-NG)--the federal government's current system for tracking information on contracting actions--as their primary source of data, and noted numerous deficiencies with these data for the purposes of conducting strategic sourcing research. Agencies reported that when additional data sources are added, incompatible data and separate systems often presented problems. We have previously reported extensively on issues agencies faced in gathering data to form the basis for their spend analysis. However, some agencies have been able to make progress on conducting enterprise-wide opportunity analyses despite flaws in the available data. For example, both the FSSI Program Management Office and DHS told us that current data, although imperfect, provide sufficient information for them to begin to identify high spend opportunities. DHS has in fact evaluated the majority of its 10 highest-spend commodities and developed sourcing strategies for seven of those based on its analysis of primarily FPDS-NG data. Further, we have previously reported that the General Services Administration estimated federal agencies spent about $1.6 billion during fiscal year 2009 purchasing office supplies from more than GSA used available data on spending to support 239,000 vendors.development of the Office Supplies Second Generation FSSI, which focuses office supply spending to 15 strategically sourced contracts. Expertise: Officials at several agencies also noted that the lack of trained acquisition personnel made it difficult to conduct an opportunity analysis and develop an informed sourcing strategy. For example, Army officials cited a need for expertise in strategic sourcing and spend analysis data, and OMB officials echoed that a key challenge is the dearth of strategic sourcing expertise in government. VA and Energy also reported this challenge. A few agencies have responded to this challenge by developing training on strategic sourcing for acquisition personnel. For example, the Air Force noted that it instituted training related to strategic sourcing because it is necessary to have people who are very strong analytically to do the front-end work for strategic sourcing, and these are the hardest to find. The training course facilitates acquisition personnel in obtaining the strong analytical skills to perform steps like market evaluation. VA has also begun to develop training to address this challenge. Leadership commitment: We also found in 2012 that most of the agencies we reviewed were challenged by a lack of leadership commitment to strategic sourcing, although improvements were under way. We have reported that in the private sector, the support and commitment of senior management is viewed as essential to facilitating companies' efforts to re-engineer their approaches to acquisition as well as to ensuring follow through with the strategic sourcing approach. However, we found in 2012 that leaders at some agencies were not dedicating the resources and providing the incentives that were necessary to build a strong foundation for strategic sourcing. Metrics: A lack of clear guidance on metrics for measuring success has also impacted the management of ongoing FSSI efforts as well as most selected agencies' efforts. We found that agencies were challenged to produce utilization rates and other metrics--such as spending through strategic sourcing contracts and savings achieved-- that could be used to monitor progress. Several agencies also mentioned a need for sustained leadership support and additional resources in order to more effectively monitor their ongoing initiatives. Agency officials also mentioned several disincentives that can discourage procurement and program officials from proactively participating in strategic sourcing, and at many agencies, these disincentives have not been fully addressed by leadership. Key disincentives identified by agency officials include the following: A perception that reporting savings due to strategic sourcing could lead to program budgets being cut in subsequent years, Difficulty identifying existing strategic sourcing contracts that are available for use as there is no centralized source for this information, A perception that strategically sourced contract vehicles may limit the ability to customize requirements, A desire on the part of agency officials to maintain control of their Program officials' and contracting officers' relationships with existing The opportunity to get lower prices by going outside of strategically sourced contracts. Leaders at some agencies have proactively introduced practices that address these disincentives to strategically source. For example, DHS and VA reported increasing personal incentives for key managers by adding strategic sourcing performance measures to certain executives' performance evaluations. In addition, several agencies including DOD, DHS, and VA have instituted policies making use of some strategic sourcing contracts mandatory or mandatory "with exception," although the extent to which these policies have increased use of strategic sourcing vehicles is not yet clear. Some agencies have made use of automated systems to direct spending through strategic sourcing contracts. For example, FSSI issued a blanket purchase agreement through its office supplies initiative that included provisions requiring FSSI prices to be automatically applied to purchases made with government purchase cards. VA reported that its utilization rate for the office supplies FSSI contracts increased from 12 percent to 90 percent after these measures took effect. In fiscal year 2012, the federal government obligated $307 billion to acquire services ranging from the management and operations of government facilities, to information technology services, to research and development. This represents over half of all government procurements. Making services procurement more efficient is particularly relevant given the current fiscal environment, as any savings from this area can help agencies mitigate the adverse effects of potential budget reductions on their mission. Moreover, our reports have shown that agencies have difficulty managing services acquisition and have purchased services inefficiently, which places them at risk of paying more than necessary. These inefficiencies can be attributed to several factors. First, agencies have had difficulty defining requirements for services, such as developing clear statements of work which can reduce the government's risk of paying for more services than needed. Second, agencies have not always leveraged knowledge of contractor costs when selecting contract types. Third, agencies have missed opportunities to increase competition for services due to overly restrictive and complex requirements; a lack of access to proprietary, technical data; and supplier preferences. We found that strategic sourcing efforts addressed products significantly more often than services and that agencies were particularly reluctant to apply strategic sourcing to the purchases of services. For example, of the top spending categories that DOD components reported targeting through implemented strategic sourcing initiatives, only two are services. Officials reported that they have been reluctant to strategically source services for a variety of reasons, such as difficulty in standardizing requirements or a decision to focus on less complex commodities that can demonstrate success. Yet, like the commercial sector, federal agencies can be strategic about buying services. For example, DHS has implemented a strategic sourcing initiative for engineering and technical services, which is also in the top 10 spending categories for the Army, Air Force, and Navy. The reluctance of federal agencies to apply strategic sourcing to services stands in sharp contrast to leading companies. As described below, leading companies perceive services as prime candidates for strategic sourcing, though they tailor how they acquire these services based on complexity and availability. Given the trend of increased federal government spending on services and today's constrained fiscal environment, this Committee asked that we identify practices used by large commercial organizations in purchasing services. We reported on the results of this review in April 2013. Like the federal government, leading companies have experienced growth in spending on services, and over the last 5 to 7 years, have been examining ways to better manage them. Officials from seven leading companies GAO spoke with reported saving 4 to15 percent over prior year spending through strategically sourcing the full range of services they buy, including services very similar to what the federal government buys: facilities management, engineering, and information technology, for example. Leading company practices suggest that it is critical to analyze all procurement spending with equal rigor and with no categories that are off limits. Achieving savings can require a departure from the status quo. Companies' keen analysis of spending, coupled with central management and knowledge sharing about the services they buy, is key to their savings. Their analysis of spending patterns can be described as comprising two essential variables: the complexity of the service and the number of suppliers for that service. Knowing these variables for any given service, companies tailor their tactics to fit the situation; they do not treat all services the same. In our 2013 report, we highlighted quotes from company officials that illuminate what their approach to increasing procurement efficiency means to them (see table 1). Leading companies generally agreed that the following foundational principles are all important to achieving successful services acquisition outcomes: maintaining spend visibility, developing category strategies, focusing on total cost of ownership, and regularly reviewing strategies and tactics. Taken together, these principles enable companies to better identify and share information on spending and increase market knowledge about suppliers to gain situational awareness of their procurement environment. This awareness positions companies to make more informed contracting decisions. For example, in addition to leveraging knowledge about spending, leading companies centralize procurement decisions by aligning, prioritizing, and integrating procurement functions within the organization. The companies we spoke with overcame the challenge of having a decentralized approach to purchasing services, which had made it difficult to share knowledge internally or use consistent procurement tactics. Without a centralized procurement process, officials told us, companies ran the risk that different parts of the organization could be unwittingly buying the same item or service, thereby missing an opportunity to share knowledge of procurement tactics proven to reduce costs. Company officials noted that centralizing procurement does not necessarily refer to centralizing procurement activity, but to centralizing procurement knowledge. This is important because there is a perception in the federal community that strategic sourcing requires the creation of a large, monolithic buying organization. Companies also develop category-specific procurement strategies with stakeholder buy-in in order to use the most effective sourcing strategies for each category. Category-specific procurement strategies describe the most cost-effective sourcing vehicles and supplier selection criteria to be used for each category of service, depending on factors such as current and projected requirements, volume, cyclicality of demand, risk, the services that the market is able to provide, supplier base competition trends, the company's relative buying power, and market price trends. Company officials told us that category strategies help them conduct their sourcing according to a proactive strategic plan and not just on a reactive, contract-by-contract basis. One company's Chief Procurement Officer referred to the latter as a "three bids and a buy" mentality that can be very narrowly focused and result in missed opportunities such as not leveraging purchases across the enterprise or making decisions based only on short term requirements. Similarly, Boeing says it sometimes chooses to execute a short-term contract to buy time if market research shows a more competitive deal can be obtained later. In addition, companies focus on total cost of ownership--making a holistic purchase decision by considering factors other than price. This is also contrary to a perception that strategic sourcing can lose a focus on best value. For example, while Walmart may often award a contract to the lowest bidder, it takes other considerations into account--such as average invoice price, time spent on location, average time to complete a task, supplier diversity, and sustainability--when awarding contracts. Humana is developing internal rate cards for consulting services that would help the company evaluate contractors' labor rates based on their skill level. Pfizer's procurement organization monitors compliance with company processes and billing guidelines. The company considers its procurement professionals as essentially risk managers rather than contract managers because they need to consider what is best for the company and how to minimize total cost of ownership while maintaining flexibility. By following the foundational principles to improve knowledge about their procurement environment, companies are well positioned to choose procurement tactics tailored to each service. While companies emphasize the importance of observing the principles, including category strategies, they do not take a one-size-fits-all approach to individual service purchase decisions. Two factors--the degree of complexity of the service and the number of available suppliers--determine the choice of one of four general categories of procurement tactics appropriate for that service: leveraging scale, standardizing requirements, prequalifying suppliers, and understanding cost drivers. Figure 1 below shows how the two factors help companies categorize different services and select appropriate tactics. For commodity services with many suppliers, such as administrative support, facilities maintenance, and housekeeping, companies generally focus on leveraging scale and competition to lower cost. Typical tactics applicable to this quadrant of services include consolidating purchases across the organization; using fixed price contracts; developing procurement catalogs with pre-negotiated prices for some services; and varying bidding parameters such as volume and scale in order to find new ways to reduce costs. For commodity services with few suppliers, such as specialized logistics and utilities, companies focus on standardizing requirements. Typical tactics applicable to this quadrant of services include paring back requirements in order to bring them more in line with standard industry offerings, and developing new suppliers to maintain a competitive industrial base. For example, Walmart holds pre-bid conferences with suppliers such as those supplying store security for "Black Friday"--the major shopping event on the day after Thanksgiving--to discuss requirements and what suppliers can provide. Delphi makes an effort to maintain a competitive industrial base by dual-sourcing certain services in order to minimize future risk--a cost trade-off. For knowledge-based services with many suppliers, such as information technology, legal, and financial services, companies prequalify and prioritize suppliers to highlight the most competent and reasonable suppliers. Typical tactics applicable to this quadrant of services include prequalifying suppliers by skill level and labor hour rates; and tracking supplier performance over time in order to inform companies' prioritization of suppliers based on efficiency. For example, Pfizer Legal Alliance was created to channel the majority of legal services to pre-selected firms. Delphi only awards contracts to companies on their Category Approved Supplier List. The list is approved by Delphi leadership and is reviewed annually. For knowledge-based services with few suppliers, such as engineering and management support and research and development services, companies aim to maximize value by better understanding and negotiating individual components that drive cost. Typical tactics applicable to this quadrant of services include negotiating better rates on the cost drivers for a given service; closely monitoring supplier performance against pre-defined standards; benchmarking supplier rates against industry averages in order to identify excess costs; and improving collaboration with suppliers (see table 2). Companies we reviewed are not content to remain limited by their environment; over the long term, they generally seek to reduce the complexity of requirements and bring additional suppliers into the mix in order to commoditize services and leverage competition. This dynamic, strategic approach has helped companies demonstrate annual, sustained savings. Companies generally aim to commoditize services over the long term as much as possible because, according to them, the level of complexity directly correlates with cost. Companies also aim to increase competition, whether by developing new suppliers or reducing requirements complexity, which could allow more suppliers to compete. In doing so, companies can leverage scale and competition to lower costs. OMB and other agencies have recently taken actions to expand the use of strategic sourcing. In September 2012, GAO recommended that the Secretary of Defense, the Secretary of Veterans Affairs, and the Director of OMB take a series of detailed steps to improve strategic sourcing efforts. More specifically, we recommended that DOD evaluate the need for additional guidance, resources, and strategies, and focus on DOD's highest spending categories; VA evaluate strategic sourcing opportunities, set goals, and establish OMB issue updated government-wide guidance on calculating savings, establish metrics to measure progress toward goals, and identify spending categories most suitable for strategic sourcing. In commenting on the September 2012 report, DOD, VA, and OMB concurred with the recommendations and stated they would take action to adopt them. We reported in April 2013 that DOD and VA had not fully adopted a strategic sourcing approach but had actions under way. For example, at that time, DOD had developed a more comprehensive list of the department's strategic sourcing efforts, was creating additional guidance that includes a process for regular review of proposed strategic sourcing initiatives, noted a more focused targeting of top procurement spending categories for supplies, equipment, and services, and was assessing the need for additional resources to support strategic sourcing efforts. VA reported that it had taken steps to better measure spending through strategic sourcing contracts and was in the process of reviewing business cases for new strategic sourcing initiatives, and adding resources to increase strategic sourcing efforts. In 2012, OMB released a Cross-Agency Priority Goal Statement, which called for agencies to strategically source at least two new products or services in both 2013 and 2014 that yielded at least 10 percent savings. At least one of these new initiatives is to target information technology commodities or services. In December 2012, OMB further directed certain agencies to reinforce senior leadership commitment by designating an official responsible for coordinating the agency's strategic sourcing activities. In addition, OMB identified agencies that should take a leadership role on strategic sourcing. OMB called upon these agencies to lead government-wide strategic sourcing efforts by taking steps such as recommending management strategies for specific goods and services to ensure that the federal government receives the most favorable offer possible. OMB directed these agencies to promote strategic sourcing practices inside their agencies by taking actions including collecting data on procurement spending. In closing, current fiscal pressures and budgetary constraints have heightened the need for agencies to take full advantage of strategic sourcing. These practices drive efficiencies and yield benefits beyond savings, such as increased business knowledge and better supplier management. Government-wide strategic sourcing efforts have been initiated, and federal agencies have improved and expanded upon their use of strategic sourcing to achieve cost savings and other benefits. However, little progress has been made over the past decade and much more needs to be done to better incorporate strategic sourcing leading practices, increase the amount of spending through strategic sourcing, and direct more efforts at high spend categories, such as services. Companies have shown that it is possible to save money by strategically managing services. They have done so not just by consolidating purchases of simple, commodity-like services; they have devised strategies and tactics to manage sophisticated services. Companies have also shown that savings come over a wide base and that results can be achieved with leadership, shared data, and a focus on strategic categories that is dynamic rather than static. Strategic sourcing efforts to date have targeted a small fraction of federal procurement spending. As budgets decline, however, it is important that the cost culture in federal agencies change. Adopting leading practices can enable agencies to provide more for the same budget. Chairman Carper, Ranking Member Coburn, and Members of the Committee, this concludes my statement. I would be pleased to answer any questions at this time. For future questions about this statement, 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 statement. Individuals making key contributions to this statement include W. William Russell, Assistant Director; Peter Anderson; Leigh Ann Haydon; John Krump; Roxanna Sun; Molly Traci; Ann Marie Udale; Alyssa Weir; and Rebecca Wilson. 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.

GAO has reported that the government is not fully leveraging its aggregate buying power. Strategic sourcing, a process that moves an organization away from numerous individual procurements to a broader aggregate approach, has allowed leading companies to achieve savings of 10 percent or more. A savings rate of 10 percent of total federal procurement spending would represent more than $50 billion annually. While strategic sourcing makes good sense and holds the potential to achieve significant savings, federal agencies have been slow to embrace it, even in a time of great fiscal pressure. This statement highlights GAO's recent findings related to the use of strategic sourcing across government, best practices leading companies are adopting to increase savings when acquiring services, and recent actions that could facilitate greater use of strategic sourcing. GAO's testimony is based largely on GAO's September 2012 report on strategic sourcing and GAO's April 2013 report on leading practices for acquiring services, as well as other GAO reports on contracting and acquisition. Most of the agencies GAO reviewed for its September 2012 report leveraged a fraction of their buying power. More specifically, in fiscal year 2011, the Departments of Defense (DOD), Homeland Security, Energy, and Veterans Affairs (VA) accounted for 80 percent of the $537 billion in federal procurement spending, but reported managing about 5 percent of that spending, or $25.8 billion, through strategic sourcing efforts. Similarly, GAO found that the Federal Strategic Sourcing Initiative had only managed a small amount of spending through its four government-wide strategic sourcing initiatives in fiscal year 2011, although it reported achieving significant savings on those efforts. Further, we found that most selected agencies' efforts did not address their highest spending areas, such as services, which may provide opportunities for significant savings. Companies' keen analysis of spending is key to their savings, coupled with central management and knowledge sharing about the services they buy. Their analysis of spending patterns comprises two essential variables: the complexity of the service and the number of suppliers for that service. Knowing these variables for any given service, companies tailor their tactics to fit the situation, and do not treat all services the same. Leading companies generally agreed that foundational principles--maintaining spend visibility, centralizing procurement, developing category strategies, focusing on total cost of ownership, and regularly reviewing strategies and tactics--are all important to achieving successful services acquisition outcomes. Taken together, these principles enable companies to better identify and share information on spending and increase market knowledge about suppliers to gain situational awareness of their procurement environment and make more informed contracting decisions. Like the federal government, leading companies have experienced growth in spending on services, and over the last 5 to 7 years have been examining ways to better manage spending. Officials from seven leading companies GAO spoke with reported saving 4 to 15 percent over prior year spending through strategically sourcing the full range of services they buy, including those very similar to what the federal government buys--for example, facilities management, engineering, and information technology. Agencies have not fully adopted a strategic sourcing approach but some have actions under way. For example, in April 2013, DOD was assessing the need for additional resources to support strategic sourcing efforts, and noted a more focused targeting of top procurement spending categories for supplies, equipment, and services. VA reported that it had taken steps to better measure spending through strategic sourcing contracts and was in the process of reviewing business cases for new strategic sourcing initiatives. In 2012, the Office of Management and Budget (OMB) released a Cross-Agency Priority Goal Statement, which called for agencies to strategically source at least two new products or services in both 2013 and 2014 that yield at least 10 percent savings. In December 2012, OMB further directed agencies to reinforce senior leadership commitment by designating an official responsible for coordinating the agency's strategic sourcing activities. In addition, OMB identified agencies that should take a leadership role on strategic sourcing. OMB directed these agencies to promote strategic sourcing practices inside their agencies by taking actions including collecting data on procurement spending. GAO is not making any new recommendations in this testimony. GAO has made recommendations to OMB, DOD, VA, and other agencies on key aspects of strategic sourcing and acquisition of products and services in the past. These recommendations addressed such matters as setting goals and establishing metrics. OMB and the agencies concurred with the recommendations, and are in the process of implementing them.

For more than 50 years, IRS has collected estimated taxes on income not subject to withholding, which is known as nonwage income. Nonwage income generally includes income from pensions, interest, self-employment, capital gains, dividends, and partnerships. In 1994, these six categories accounted for 91 percent of all nonwage income. Nonwage income has represented a growing proportion of total U.S. income in recent years, increasing from 16.7 percent to 23.3 percent between 1970 and 1994. The percentage of tax returns reporting only nonwage income has likewise increased from 10 percent to 14 percent over the same period. The ES process requires taxpayers to make four payments to IRS at regular intervals during the tax year. At the beginning of the tax year, taxpayers are to estimate their annual income, determine their potential tax liability, and compute their ES payments. For tax years beginning on January 1, ES payments are due on April 15, June 15, September 15, and January 15 of the following year. If taxpayers underpay their ES payments, they may be liable for ES penalties. Taxpayers who underpay can choose either to have IRS calculate any penalty they owe or to self-assess their own penalty using a Form 2210. Taxpayers using the form to self-assess their ES penalties can use either the short or regular method to calculate their ES penalty amounts. The ES penalty equals the interest on the underpaid amount for the number of days it is outstanding. The interest rate used to compute the penalty is based on the federal short-term interest rate, which is subject to change the first day of each quarter, that is, January 1, April 1, July 1, and October 1. IRS updates the Form 2210 annually to account for changes in the federal short-term interest rate. (See app. I for a copy of a Form 2210.) In 1994, about 4 million taxpayers self-assessed their ES penalties. We could not determine how many of them used the short or regular method because IRS does not collect the data necessary to make that determination. However, to provide a rough approximation of how many taxpayers used the regular method, we examined 100 tax returns from the 1994 Statistics of Income database--the latest information available. The 100 returns were selected to represent taxpayers who either paid ES penalties or were otherwise affected by the ES process. Of the 75 taxpayers who self-assessed their ES penalties, we found that over half used the regular method. Our objectives were to identify causes for the complexity in the ES penalty process and to determine whether changes could be made to simplify the process for taxpayers who use the regular method to calculate their ES penalties. To achieve our objectives, we reviewed IRS reports on the estimated tax process; analyzed the instructions for preparing the Form 2210 and discussed the ES process with IRS officials; and reviewed a random sample of 100 taxpayer returns subject to the ES process to obtain a rough approximation of how many taxpayers used the regular method. The sample, which was too small to reliably project to the universe, was extracted from IRS' tax year 1994 Statistics of Income database. We did our audit work in Washington, D.C., and San Francisco between September 1997 and March 1998 in accordance with generally accepted government auditing standards. We requested comments on a draft of this report from the Commissioner of Internal Revenue. The comments we received are in appendix II and are evaluated at the end of this letter. The Form 2210 includes three requirements that complicate the ES penalty process and result in additional calculations that need to be made by taxpayers who use the regular method. Simplifying the underpayment schedule, changing the effective dates of the ES penalty interest rates, and using a 365-day year for all ES penalty calculations would make the form easier to understand and reduce the number of ES penalty calculations taxpayers have to make. The changes to the underpayment schedule and the ES penalty calculations could be made administratively by IRS, while changing the effective dates of the ES penalty interest rates would require legislative action. These changes would have either little or no effect on ES penalty amounts. The Form 2210 underpayment schedule is used to determine taxpayers' underpayments in each of the four ES payment periods. The underpayment calculation first requires taxpayers to apportion the required annual payment amount--the amount of taxes that should have been paid during the year--to each of the four ES payment periods. The apportioned amounts are the required ES installments--the taxes that should have been paid in each of the ES payment periods. Conceptually, the basis for the underpayment calculation is relatively straightforward. To determine the underpayment amount, taxpayers essentially compare the ES installment with the ES payments made and any withholding during the payment period. When the installment amount is greater than the combined amounts of ES payments and withholding, taxpayers have an underpayment and are liable for ES penalties. However, in actual practice, taxpayers must follow a more complicated procedure to calculate their underpayments. This procedure entails additional calculations to account for underpayment balances that may remain from previous payment periods. These additional calculations are necessary to comply with the definition of the term "underpayment" in section 6654(b)(1) of the Internal Revenue Code. The definition precludes existing underpayment balances from being used in underpayment calculations for succeeding ES payment periods. To illustrate the complexity of this procedure, a completed Form 2210 for a hypothetical taxpayer is shown in figure III.1 in appendix III. The underpayment schedule would be simplified by changing the form so as to allow taxpayers to carry forward underpayment balances to succeeding ES payment periods. To calculate their underpayments using this simplified approach, taxpayers would subtract the combined amount of their ES payment and withholding from the total of their current ES installment and their underpayment balance from the previous payment period. This change would reduce the number of calculations taxpayers have to make on the underpayment schedule but would, in some cases, make the computed underpayment amounts different. Figure III.2 in appendix III shows our revised underpayment schedule for a hypothetical taxpayer. To avoid a difference in the ES penalty amounts calculated using the different underpayment amounts, a corresponding change to the ES penalty underpayment period would be needed. The change would further simplify the process for taxpayers by eliminating additional ES penalty calculations, while ensuring that ES penalty amounts are not affected. Appendix IV shows a comparison of ES penalty calculations required under the current and simplified approaches. Although simplifying the Form 2210 underpayment schedule and changing the underpayment period in the ES penalty calculation schedule would reduce the number of calculations taxpayers need to make, it would require that taxpayers and tax preparers adjust to a revised Form 2210, which has not changed since 1986. However, we believe the recurring advantages of simplifying the form outweigh this one-time adjustment. To determine their ES penalties, taxpayers must calculate the interest on the underpayment amount for the number of days it was outstanding, that is, the number of days between when the taxpayer should have made the ES payment and the earlier of (1) when the payment was actually made, or (2) the 15th day of the 4th month following the close of the taxable year (April 15 for a taxpayer using a calendar-year basis). The interest rate used in the calculation is based on the federal short-term interest rate, which is subject to change on the first day of each quarter. Under the current approach, if interest rates change while an underpayment is outstanding, taxpayers are required to make separate calculations for the periods before and after the interest rate change. Typically, in such instances, the separate calculations are necessary to cover only 15-day periods because the applicable ES payment dates occur either 15 days immediately before or after the effective dates of interest rate changes. For example, the July 1 interest rate change occurs 15 days after the June 15 payment date. This use of different dates for ES payment dates and interest rate effective dates has the effect of increasing the number of penalty calculations taxpayers must make. Table 1 illustrates the calculations that would have to be made by a hypothetical taxpayer with underpayments in three ES payment periods. To compute the ES penalty for the June 15 underpayment, the taxpayer would need to make two calculations, numbers 1 and 2, because the April 1 interest rate was in effect during the first period the underpayment was outstanding and the July 1 interest rate was in effect for the second period the underpayment was outstanding. Similarly, three calculations, numbers 3, 4, and 5 would be necessary to compute the taxpayer's ES penalty for the September 15 underpayment because three different interest rates were in effect during the period the underpayment was outstanding. Unlike the ES penalty calculations previously discussed, penalty calculation number 6 is different. For that penalty, only one calculation at the January 1 interest rate would be required for the entire period the underpayment was outstanding because of a special rule in section 6621(b)(2)(B) of the Internal Revenue Code. The special rule, in essence, changes the effective date of the April 1 interest rate change to April 15, thereby allowing IRS to use the January 1 interest rate for the 15-day period between April 1 and April 15. Expansion of the special rule to cover all ES payment dates and interest rate dates would reduce the number of calculations taxpayers would have to make. Specifically, aligning the July 1, October 1, and January 1 interest rate effective dates with the June 15, September 15, and January 15 ES payment dates, respectively, would eliminate the 15-day ES penalty calculations. Instead, taxpayers would make only one calculation at the interest rate, which becomes effective at the end of the affected 15-day period. To illustrate the effect of the change, we used the hypothetical taxpayer case shown in table 1. Under an expanded special rule, the taxpayer would be required to make only three calculations rather than six, as shown in table 2. Expanding the special rule would have little effect on ES penalty amounts, either increasing or decreasing them for the affected 15-day periods, depending on the direction of the interest rate change. For example, if the interest rates increased on July 1, the rate used to calculate ES penalties for June 15 underpayments would be the higher July 1 rate rather than the lower rate effective before July 1. Conversely, if the interest rates decreased on July 1, ES penalties would be based on the lower July 1 rate. Expressed in terms of the ES underpayment, a 1-percent change for the 15-day period increases or decreases an ES penalty by 0.04 percent of the underpayment amount, or $4.11 on a $10,000 underpayment. We analyzed the effect of expanding the special rule on actual ES penalty amounts for 32 taxpayers in our sample of 100 taxpayers subject to the ES process who used the regular method in 1994 and who had submitted Form 2210s with their tax returns. A comparison of the ES penalty amounts computed using the expanded special rule with the actual ES penalties showed that changes were relatively small. In 15 cases, the ES penalties did not change. In the 17 other cases, the changes ranged from an increase of $1 on a $49 penalty to an increase of $163 on a $8,573 penalty. In 24 cases, the use of the expanded rule reduced the number of penalty calculations taxpayers needed to make. In 1 case, the number of penalty calculations declined from 11 to 4. (See app. VI for more details on the comparison and the ES penalty calculation schedules required on the current and revised Form 2210 for a sample case.) The comparison reflects 1994 interest rates, which increased from 7 to 9 percent during the year. If interest rates had decreased, the ES penalty amounts would have similarly decreased. Over the 10-year period 1987 through 1996, changes in the interest rate used to compute ES penalties varied, increasing in 2 years, decreasing in 2 years, both increasing and decreasing in 4 years, and not changing in 2 years. (See app. V for a summary of interest rate changes over the 10-year period.) Under current IRS procedures, taxpayers who have outstanding underpayment balances that extend through the end of a leap year must make separate calculations to account for the change from a 366- to a 365-day year regardless of whether there is an interest rate change on January 1. For example, if a taxpayer has an underpayment on September 15 that extends through January 15, the taxpayer would have to make two calculations to compute the ES penalty. For the first calculation, which would cover the period September 15 through December 31, the taxpayer would need to use a 366-day year in the formula. For the second calculation, which would cover the period January 1 through January 15, the taxpayer would need to use a 365-day year in the formula. In years preceding a leap year, taxpayers would have to use a similar calculation method to account for the change from a 365- to a 366-day year. The current process could be simplified by allowing taxpayers to use a 365-day year for all ES penalty calculations, regardless of the year. If there were no interest rate change on January 1, this change would eliminate an extra calculation for taxpayers with outstanding underpayment balances extending either through the end of a leap year or the end of a year preceding a leap year. This change would increase ES penalty amounts by 0.3 percent during the period affected. For example, the ES penalty computed using the current method would be $2,557 on a $40,000 underpayment outstanding for 260 days at 9 percent. Using a 365-day year in the same calculation results in an ES penalty of $2,564. The dollar amount of the increase would vary depending on the underpayment amount and how long it was outstanding. Modifying the ES penalty calculation would require taxpayers and tax preparers to adjust to a revised Form 2210, which has not been changed since 1986. Making the adjustment would not be difficult because it would occur one time and would affect only the calculation of the ES penalty. The rules governing application of the ES penalty process would not be affected by the change. The effect on IRS would also be minimal, since they currently revise the Form 2210 annually to account for interest rate changes. The benefits of modifying the ES penalty calculation process would be recurring for taxpayers who use the regular method. Revising the underpayment schedule would make it easier to understand and would reduce the number of calculations taxpayers have to make on the schedule. Similarly, adjusting the effective dates for interest rates used to compute ES penalties and using a 365-day year to calculate all ES penalties could further reduce the number of calculations taxpayers would have to make. To help ensure compliance with the Internal Revenue Code and IRS administrative requirements, the Form 2210 requires taxpayers to perform numerous calculations to track individual underpayment amounts and to determine precise ES penalty amounts. In three instances, the additional calculations did not seem to be justified because they resulted in either little or no change in penalty amounts. Administrative changes and legislative action would be needed to reduce the number of calculations required on the Form 2210 and make it easier for taxpayers to complete. Although the changes would require taxpayers and tax preparers to adjust to using a new form, we believe the recurring advantages of the change would outweigh that one-time adjustment. To simplify the ES penalty process for taxpayers, we recommend that the Commissioner of Internal Revenue revise the Form 2210 underpayment schedule to allow taxpayers to track the accumulated underpayment amount rather than individual underpayment amounts and revise the Form 2210 ES penalty calculation schedule to allow taxpayers to use a 365-day year in all ES penalty calculations. To further simplify the ES penalty process for taxpayers, we recommend that Congress amend section 6621(b)(2)(B) of the Internal Revenue Code to include the periods June 15 through June 30, September 15 through September 30, and January 1 through January 15. We obtained written comments on a draft of this report from the Commissioner of Internal Revenue (see app. II). The Commissioner said that he generally agreed with all of our recommendations. The Commissioner commented, however, that IRS would not consider revising the Form 2210 underpayment schedule before legislative action is taken to amend section 6621(b)(2)(B) and expand the ES special rule to the new periods. IRS believes that expanding the special rule would provide the greatest relief to taxpayers and that revising the Form 2210 without incorporating that change would not be justified by the lesser benefits derived from revising the underpayment schedule. We concur with IRS' position and believe that all changes should be made at the same time to minimize the adjustment required by taxpayers and tax preparers to the revised Form 2210. We are sending copies of this report to the Secretary of the Treasury, Commissioner of Internal Revenue, and other interested parties. We will make copies available to others upon request. The major contributors to this report are listed in appendix VII. If you have any questions, please contact me on (202) 512-9110. In figures III.1 and III.2, we compare section A, lines 21-29, of the current Form 2210 Underpayment Schedule with our revised section A for a hypothetical taxpayer. The hypothetical taxpayer had underpayments of $5,000 in each ES payment period, and made ES payments of $3,000 on April 15, $1,000 on June 15, $2,000 on July 30, $4,500 on September 15, and $9,500 on January 15. In tables IV.1 and IV.2, we compare the ES penalty calculations necessary using the instructions on the current Form 2210 with the ES penalty calculations necessary if the instructions for the calculations were revised in accordance with the revisions made to simplify the form's underpayment schedule. Eight calculations are necessary under the current instructions to determine the total ES penalty. Three calculations for the $2,000 underpayment are needed to account for (1) the $1,000 payment on June 15, (2) the interest rate change on July 1, and (3) the $2,000 payment on July 30. Three calculations for the $5,000 underpayment are needed to account for (1) the interest rate change on July 1, (2) the $1,000 payment on July 30, and (3) the $4,500 payment on September 15. Two calculations for the $4,500 underpayment are needed to account for (1) the interest rate change on October 1, and (2) the $9,500 payment on January 15. The revised instructions affect underpayments outstanding through more than one ES payment period, and the difference involves the period used to calculate the ES penalty. The difference is illustrated in tables IV.1 and IV.2 by the calculations used to compute the ES penalty for the $2,000 underpayment. In table IV.1, the $2,000 underpayment is outstanding from April 15, the ES payment due date, to July 30, when the underpayment balance was paid. Under the revised instructions, the underpayment is outstanding from April 15 to June 15, the next ES payment due date. Under the revised instructions, there is a $1,000 underpayment balance outstanding on June 15 that is not paid until July 30. This $1,000 balance is accounted for by carrying it forward to the next ES payment period, as shown in appendix III. In figure III.2, the underpayment for June 15 is $6,000, while the underpayment for the same period in figure III.1 is $5,000. As a result, the ES penalty for the $1,000 balance is included in the ES penalty calculated for the $6,000 underpayment, shown in table IV.2. The number of calculations necessary for the June 15 and September 15 underpayments are the same under both methods because the underpayments are not outstanding through more than one ES payment period. However, calculation numbers 2 and 5 in table IV.2 could be eliminated by expanding the ES special rule (see pp. 6-9). Change in Interest Rate and New Interest Rate +1(10%) +1(11%) -1(10%) +1(11%) +1(12%) -1(11%) -1(10%) -1(9%) -1(8%) -1(7%) +1(8%) +1(9%) +1(10%) -1(9%) -1(8%) +1(9%) In table VI.1, we compare the ES penalty amounts computed for 32 sampled taxpayers using the current Form 2210 and the penalties computed using the expanded special rule. In tables VI.2 and VI.3, we compare the ES penalty schedule required on the current Form 2210 and on the revised Form 2210 for sample case number 13. Table VI.1: Comparison of ES Penalty Amounts Computed for 32 Sampled Taxpayers Using the Current Form 2210 and the Expanded Special Rule Percent of Form 2210 amount (continued) Percent of Form 2210 amount Table VI.2: ES Penalty Calculations Required for Sample Number 13 Using the Current Form 2210 (c) (d) April 16, 1994 - June 30, 1994 30. Number of days FROM the date shown above line 30 TO the date the amount on line 28 was paid or 6/30/94, whichever is sooner. July 1, 1994 - September 30, 1994 32. Number of days FROM the date shown above line 30 TO the date the amount on line 28 was paid or 6/30/94, whichever is sooner. On the current Form 2210, 11 calculations (results in bold) were necessary to compute the total ES penalty because the underpayments in columns (b) and (c) were outstanding through January 15 and April 15, respectively, and interest rates changed twice during that period. On the revised Form 2210, only four calculations would be necessary to compute the ES penalty because rather than tracking each underpayment until it is paid, the ES penalty is calculated for the underpayment at the end of each ES payment period. Any remaining underpayment balance is carried forward, and the ES penalty for the accumulated balance would be calculated at the end of the next ES payment period. Ralph Block, Assistant Director John Zugar, Senior Evaluator Susan Mak, Evaluator Gerhard Brostrom, Communications Analyst The first copy of each GAO report and testimony is free. 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Pursuant to a legislative requirement, GAO reviewed the: (1) Internal Revenue Code and the Internal Revenue Service (IRS) administrative requirements that cause some of the complexity associated with estimated tax (ES) penalty calculations; and (2) likely effects of corresponding changes to the requirements that would make it easier for taxpayers to calculate their ES penalties. GAO noted that: (1) to help ensure compliance with the Internal Revenue Code and IRS administrative requirements, form 2210 requires numerous calculations to track individual ES underpayments and to determine precise ES penalty amounts; (2) GAO identified three requirements where the additional calculations did not seem to be justified because they resulted in either little or no effect on ES penalty amounts; (3) the form 2210 underpayment schedule, which currently requires that taxpayers track each underpayment individually, results in a complicated procedure, involving numerous calculations, to comply with the definition of underpayment in the Code; (4) GAO found that if taxpayers were allowed to track the accumulated underpayment amounts rather than if individual amounts and if a corresponding change were made to the ES penalty underpayment period, taxpayers could reduce the number of calculations without affecting ES penalty amounts; (5) taxpayers currently have to make additional ES penalty calculations to account for three of the four 15-day periods between ES interest rate effective dates and ES payment dates; (6) if interest rates change, this requirement increases the number of calculations taxpayers must make but only increases or decreases the penalties by small amounts; (7) in 1986, Congress eliminated this requirement for the 15-day period between April 1 and April 15 by aligning the interest rate effective date with the ES payment date; (8) similar alignments for the other three 15-day periods during the year would eliminate the calculations taxpayers must make for the 15-day periods and have little effect on ES penalty amounts; (9) to account for leap years, taxpayers currently have to make additional ES penalty calculations when underpayment balances extend either through the end of the leap year or the end of the year preceding a leap year; and (10) GAO found that, if taxpayers were allowed to use a 365-day year in all ES penalty calculations, they could eliminate the additional calculations and the penalties for the periods affected would increase by a very small amount--only 0.3 percent.

The Coast Guard is the lead federal agency for maritime security within DHS. The Coast Guard is responsible for a variety of missions, including ensuring ports, waterways, and coastline security; conducting search and rescue missions; interdicting illicit drug shipments and illegal aliens; and enforcing fisheries laws. In 1996, in order to continue carrying out its responsibilities and operations, the Coast Guard initiated the Deepwater program to replace or upgrade its aging vessels, aircraft, and other essential equipment. As originally conceived, Deepwater was designed around producing aircraft and vessels that would function in the Coast Guard's traditional at- sea roles--such as interdicting illicit drug shipments or rescuing mariners from difficulty at sea--and the original 2002 Deepwater program was focused on those traditional missions. After the terrorist attacks on September 11, 2001, the Coast Guard was also assigned homeland security missions related to protection of ports, waterways, and coastal areas. Based on its revised mission responsibilities, the Coast Guard updated its Deepwater Acquisition Program Baseline in November 2005. The new baseline contained changes in the balance between new assets to be acquired and legacy assets to be upgraded and adjusted the delivery schedule and costs for many of these assets. Overall, the Deepwater acquisition schedule was lengthened by 5 years, with the final assets now scheduled for delivery in 2027. Upon its completion, the Deepwater program is to consist of 5 new classes of vessels, 1 new class of fixed-wing aircraft, 1 new class of unmanned aerial vehicles, 2 classes of upgraded helicopters, and 1 class of upgraded fixed-wing aircraft. The 215 new vessels consist of five new asset classes--the National Security Cutter (NSC), Offshore Patrol Cutter (OPC), Fast Response Cutter (FRC), Long-Range Interceptor (LRI), and Short-Range Prosecutor (SRP). The 240 aircraft are composed of two new aircraft classes, the Vertical Unmanned Aerial Vehicle (VUAV) and the Maritime Patrol Aircraft (MPA); and three upgraded asset classes--the Long-Range Surveillance Aircraft (LRS), Medium-Range Recovery Helicopter (MRR), and the Multi-Mission Cutter Helicopter (MCH). Table 1 provides an overview, by asset class, of the Deepwater vessels to be acquired and table 2 provides an overview of the Deepwater aircraft to be acquired or upgraded. As noted in Table 1, the 140-foot FRC was designated as a replacement vessel for the 110-foot and 123-foot patrol boats. Since 2001, we have reviewed the Deepwater program and have informed Congress, DHS, and Coast Guard of the problems, risks, and uncertainties inherent with such a large acquisition that relies on a system integrator to identify the assets needed and then using tiers of subcontractors to design and build the assets. In March 2004, we made recommendations to the Coast Guard to address three broad areas of concern: improving program management, strengthening contractor accountability, and promoting cost control through greater competition among potential subcontractors (see table 3). We have issued a number of follow-on reports describing efforts the Coast Guard has taken to address these recommendations. (See app. I for a list of related GAO products.) Between January 2001 and November 2006, numerous events led up to the failure of the Coast Guard's bridging strategy to convert the legacy 110-foot patrol boats into 123-foot patrol boats. In January 2001, an independent study found that the 110-foot patrol boats based in south Florida and Puerto Rico were experiencing severe hull corrosion and that their structural integrity was deteriorating rapidly. To address these issues, the Coast Guard's original (2002) Deepwater plan included a strategy to convert all 49 of the 110-foot patrol boats into 123-foot patrol boats to strengthen the hulls. Also, the plan was to provide additional capabilities, such as stern launch and recovery capabilities and enhanced and improved command, control, communications, computers, intelligence, surveillance, and reconnaissance (C4ISR). While Coast Guard originally planned to convert all 49 of its 110-foot patrol boats to 123-foot patrol boats, it halted the patrol boat conversion program after 8 boats because of continued hull buckling and the inability of these converted patrol boats to meet post-September 11, 2001 mission requirements. These 8 converted boats were removed from service on November 30, 2006 because of operational and safety concerns. The first patrol boat conversion was completed in March 2004, on the Matagorda. Between March 2004 and late August 2004, the Matagorda underwent additional maintenance that was not included in the contract to convert it to 123 feet, according to Coast Guard officials. On September 10, 2004, while en route to its home port in Key West, the Matagorda experienced hull and deck buckling, while transiting the Gulf of Mexico. By March 2005, 2 other converted 123-foot patrol boats, the Nunivak and the Padre, also began experiencing problems with hull buckling. That same month, similar hull deformations were discovered in 3 other 123-foot patrol boats--the Metompkin, Vashon, and Monhegan. As a result of the deteriorating hull conditions, Coast Guard imposed operational restrictions in April 2005 on the 123-foot patrol boats. These restrictions specified that the converted patrol boats could not operate in seas with wave heights exceeding 8 feet (they were originally intended to operate in seas up to roughly 13 feet) and that they had to operate at reduced speeds. Figure 1 provides a timeline of key events that led to the eventual removal from service of the 123-foot patrol boats. The Coast Guard is taking actions to mitigate the operational impacts resulting from the removal of the 123-foot patrol boats from service. Specifically, in recent testimony, the Commandant of the Coast Guard stated that Coast Guard has taken the following actions: multi-crewing certain 110-foot patrol boats with crews from the 123-foot patrol boats that have been removed from service so that patrol hours for these vessels can be increased; deploying other Coast Guard vessels to assist in missions formerly performed by the 123-foot patrol boats; and securing permission from the U.S. Navy to continue using 179-foot cutters on loan from the Navy for an additional 5 years (these were originally to be returned to the Navy in 2008) to supplement the Coast Guard's patrol craft. We will continue to review the actions the Coast Guard is taking to mitigate the removal from service of the 123-foot patrol boats as part of our ongoing work. Our review of available data show that as of January 2007, of the 10 classes of Deepwater assets to be acquired or upgraded, 4 are ahead of schedule; 3 remain on schedule (and for 1 of these, design problems have arisen); and 3 are behind scheduled delivery and face design, funding, or technology challenges. Using the 2005 Deepwater Acquisition Program Baseline as the baseline, figure 2 indicates, for each asset class, whether delivery of the first-in-class (that is, the first of several to be produced in its class) is ahead of schedule, on schedule, or behind schedule, as of January 2007. Among the Deepwater assets, 3 of the 5 aircraft classes are upgrades to existing legacy systems, and these are all on or ahead of schedule; 1 new aircraft class is ahead of schedule; and the remaining new aircraft class is 6 years behind schedule. With respect to Deepwater vessels, all 5 asset classes are new, and of these, 2 are behind schedule, and a third, while on schedule, faces structural modifications. The remaining 2 new maritime assets are small vessels that are on or ahead of schedule at this time. Table 4 provides an overview of schedule status for the Deepwater aircraft and vessel classes. The status of each asset class, and our preliminary observations on the factors affecting their status, is discussed below. The LRI is a 36-foot small boat that is to be carried and deployed on each NSC and OPC. Coast Guard has one LRI on contract for delivery in August 2007, to match delivery of the first NSC. According to the Coast Guard, the SRP is on schedule at this time and 8 have been delivered to date. Coast Guard is currently planning to pursue construction and delivery of the remaining SRPs outside of the system integrator contract. By doing so, the Coast Guard expects to achieve a cost savings. The MPA is a commercial aircraft produced in Spain that is being acquired to replace the legacy HU-25 aircraft and will permit the Coast Guard to carry out missions, such as search and rescue, marine environmental protection, and maritime security. The first MPA was delivered to the Coast Guard in December 2006, and the second and third are due for delivery by April 2007. Pilots and aircrew participated in training classes in Spain, and Coast Guard is to take responsibility for the development and implementation of MPA's maintenance and logistics. The LRS is an upgraded legacy fixed-wing aircraft that includes 6 C-130Js and 16 C-130Hs. The first aircraft entered the modification process in January 2007, and five additional aircraft are to be modified by July 2008. In fiscal year 2008, funding has been requested to upgrade the C-130H radar and avionics, and for the C-130J fleet introduction. The MRR is an upgraded legacy HH-60 helicopter. It began receiving a series of upgrades beginning in fiscal year 2006, which will continue into fiscal year 2012, including the service life extension program and radar upgrades. The MCH is an upgraded legacy HH-65 helicopter. According to Coast Guard officials, the MCH assets will not have a single delivery date, as the process involves three phases of upgrades. Phase I is the purchase and delivery of new engines and engine control systems, Phase II is a service- life extension program, and Phase III includes communications upgrades. A Coast Guard official stated that 84 of the 95 HH-65s should be re-engined by June 2007, and all 95 should be finished by October 2007. The fiscal year 2008 congressional justification states that Phase II began in fiscal year 2007 and will end in fiscal year 2014, and that Phase III is to begin in fiscal year 2008 and is to end in fiscal year 2014. According to Coast Guard documentation, the NSC is on schedule for delivery despite required modifications regarding its structural integrity. In particular, the Coast Guard Commandant recently stated that internal reviews by Coast Guard engineers, as well as by independent analysts, have concluded that the NSC, as designed, will need structural reinforcement to meet its expected 30-year service life. In addition, the DHS Office of Inspector General recently reported that the NSC design will not achieve a 30-year service life based on an operating profile of 230 days underway per year in general Atlantic and North Pacific sea conditions and added that Coast Guard technical experts believe the NSC's design deficiencies will lead to increased maintenance costs and reduced service life. To address the structural modifications of the NSC, Coast Guard is taking a two-pronged approach. First, Coast Guard is working with contractors to enhance the structural integrity of the hulls of the remaining six NSCs that have not yet been constructed. Second, after determining that the NSC's deficiencies are not related to the safe operation of the vessel in the near term, Coast Guard has decided to address the structural modifications of the hulls of the first two cutters as part of planned depot-level maintenance about 5 years after they are delivered. The Commandant stated that he decided to delay the repairs to these hulls to prevent further delays in construction and delivery. Coast Guard officials have stated that further work on the development of the OPC is on hold and the Coast Guard did not request funding for the OPC in fiscal years 2007 or 2008. Delivery of the first OPC has been delayed by 5 years--from 2010 to 2015. Concerns about the viability of the design of the FRC have delayed the delivery of the first FRC by at least 2 years. As we have previously reported, design and delivery of the original FRC was accelerated as a bridging strategy to offset the failed conversion of the 110-foot patrol boats into 123-foot patrol boats. According to the 2005 Deepwater Acquisition Program Baseline, the first FRC was scheduled to be delivered in 2007--11 years earlier than the 2018 date listed in the original (2002) Deepwater plan. Coast Guard suspended design work on the FRC in late February 2006; however, because of design risks, including excessive weight and horsepower requirements. As a result, Coast Guard is moving forward with a "dual-path approach" for acquiring new patrol boats to replace its existing 110-foot and 123-foot patrol boats. The first component of this dual path approach is to have the Deepwater system integrator purchase a commercial (off-the-shelf) patrol boat design that can be adapted for Coast Guard use. According to Coast Guard officials, unlike the original plans, this FRC class is not expected to meet all performance requirements originally specified, but is intended as a way to field an FRC more quickly than would otherwise occur and that can, therefore, serve as an interim replacement for the deteriorating fleet of 110-foot patrol boats. The Coast Guard Commandant recently stated that the Coast Guard expects delivery of the commercial FRCs in the first half of fiscal year 2010, about 2 years behind the estimated delivery date specified in the 2005 Deepwater Acquisition Program Baseline. The second component of the dual-path approach is to eventually acquire another cutter--a redesigned FRC. However, due to continuing questions about the feasibility of its planned composite hull, Coast Guard has now further delayed a decision about its development or acquisition until it receives results from two studies. First, the Coast Guard is conducting a business case analysis comparing the use of composite versus steel hulls. Second, the Coast Guard told us that DHS's Science and Technology Directorate will be conducting tests on composite hull technology, and that it will wait to see the results of these tests before making a decision on the redesigned FRC. Until recently, the Coast Guard anticipated delivery of the redesigned FRC in 2009 or 2010. However, the decision to not request funding for this redesigned FRC in fiscal year 2008, and to await the results of both studies before moving forward, will likely further delay delivery of the redesigned FRC. According to the Coast Guard, evolving technological developments and the corresponding amount of funding provided in fiscal year 2006 have delayed the delivery of the VUAV by 6 years--from 2007 to 2013. As a result, the Coast Guard has adjusted the VUAV development plan. The fiscal year 2008 DHS congressional budget justification indicates that the Coast Guard does not plan to request funding for the VUAV through fiscal year 2012. Coast Guard originally intended on matching the NSC and VUAV delivery dates so that the VUAV could be launched from the NSC to provide surveillance capabilities beyond the cutter's visual range or sensors. However, with the delay in the VUAV's development schedule, it no longer aligns with the NSC's initial deployment schedule. Specifically, Coast Guard officials stated that the VUAV will not be integrated with the NSC before fiscal year 2013, 6 years later than planned. Coast Guard officials stated that they are discussing how to address the operational impacts of having the NSC operate without the VUAV. In addition, Coast Guard officials explained that since the time of the original contract award, the Department of Defense has progressed in developing a different unmanned aerial vehicle--the Fire Scout--that Coast Guard officials say is more closely aligned with Coast Guard needs. Coast Guard has issued a contract to an independent third party to compare the capabilities of its planned VUAV to the Fire Scout. Since the inception of the Deepwater program, we have expressed concerns about the risks involved with the Coast Guard's system-of- systems acquisition approach and the Coast Guard's ability to manage and oversee the program. Our concerns have centered on three main areas: program management, contractor accountability, and cost control through competition. We have made a number of recommendations to improve the program--most of which the Coast Guard has agreed with and is working to address. However, while actions are under way, a project of this magnitude will likely continue to experience other problems as more becomes known. We will continue our work focusing on the Coast Guard's efforts to address our recommendations and report on our findings later this year. In 2004, we reported that the Coast Guard had not effectively implemented key components needed to manage and oversee the system integrator. Specifically, we reported at that time and subsequently on issues related to integrated product teams (IPT), the Coast Guard's human capital strategy, and communication with field personnel (individuals responsible for operating and maintaining the assets). Our preliminary observations on the Coast Guard's progress in improving these program management areas, based on our ongoing work, follow. In 2004, we found that IPTs, the Coast Guard's primary tool for managing the Deepwater program and overseeing the contractor, had not been effective due to changing membership, understaffing, insufficient training, lack of authority for decision making, and inadequate communication. We recommended the Coast Guard take actions to address IPT effectiveness. We subsequently reported that IPT decision-making was to a large extent stove-piped, and some teams lacked adequate authority to make decisions within their realm of responsibility. Coast Guard officials believed collaboration among the subcontractors was problematic and that the system integrator wielded little influence to compel decisions among them. For example, proposed design changes to assets under construction were submitted as two separate proposals from both subcontractors rather than one coherent plan. According to Coast Guard performance monitors, this approach complicated the government review of design changes because the two proposals often carried overlapping work items, thereby forcing the Coast Guard to act as the system integrator in those situations. Although some efforts have been made to improve the effectiveness of the IPTs--such as providing them with more timely charters and entry-level training--our preliminary observations are that more improvements are needed. The Coast Guard's ability to assess IPT performance continues to be problematic. Former assessments of IPT effectiveness simply focused on measures such as frequency of meetings, attendance, and training. As a result, IPTs received positive assessments while the assets under their realm of responsibility--such as the National Security Cutter--were experiencing problems. The new team measurements include outcome- based metrics such as cost and schedule performance of assets (ships, aircraft, and command, control, communications, computers, intelligence, surveillance, and reconnaissance (C4ISR)). However, Deepwater's overall program management quarterly report shows that the connection between IPT performance and program results continues to be misaligned. For example, the first quarterly report to incorporate the new measurements, covering the period October to December 2006, indicates that the IPTs' performance for all domains is "on-schedule or non-problematic" even while some assets' cost or schedule performance is rated "behind schedule or problematic." Further, even though the Deepwater program is addressing fundamental problems surrounding the 123-foot patrol boat and FRC, IPTs no longer exist for these assets. In some cases, Coast Guard officials stated they have established work groups outside of the existing IPT structure to address identified issues and problems related to assets, such as the NSC. We will continue to review the IPTs' roles and relevance in the management of the Deepwater program. We also reported in 2004 that the Coast Guard had not adequately staffed its program management function for Deepwater. Although its Deepwater human capital plan set a goal of a 95 percent or higher "fill rate" annually for both military and civilian personnel, funded positions were below this goal. We recommended that the Coast Guard follow the procedures in its Deepwater human capital plan to ensure that adequate staffing was in place and that turnover of Coast Guard military personnel was proactively addressed. The Coast Guard subsequently revised its Deepwater human capital plan in February 2005 to emphasize workforce planning, including determining needed knowledge, skills, and abilities and developing ways to leverage institutional knowledge as staff rotate out of the program. We reported in 2005 that the Coast Guard also took some short-term steps to improve Deepwater program staffing, such as hiring contractors to assist with program support functions, shifting some positions from military to civilian to mitigate turnover risk, and identifying hard-to-fill positions and developing recruitment plans specifically for them. However, in February 2007, Coast Guard officials told us that key human capital management objectives outlined in the revised plan have not been accomplished and that the staffing levels needed to accomplish the known workload have not been achieved. In one example, a manager cited the need for five additional staff per asset under his domain to satisfy the current workload in a timely manner: contracting officer's technical representative, scheduler, cost estimator, analyst, and configuration manager. Further, a February 2007 independent analysis found that the Coast Guard does not possess a sufficient number of acquisition personnel or the right level of experience needed to manage the Deepwater program. The Coast Guard has identified an acquisition structure re- organization that includes human capital as one component of the reform. We will continue to monitor the implementation of the reorganization as part of our ongoing work. In 2004, we found that the Coast Guard had not adequately communicated to field personnel decisions on how the new and old assets were to be integrated during the transition and whether Coast Guard or system integrator personnel--or both--would be responsible for maintenance. We recommended that the Coast Guard provide timely information and training on the transition to Deepwater assets. In 2006, we reported that the Coast Guard had taken some steps to improve communications between Deepwater program and field personnel, including having field personnel as members on some IPTs. However, we continued to express concerns that field personnel were not receiving important information regarding training, maintenance, and integration of new Deepwater assets. During our ongoing work, the field personnel involved in operating and maintaining the assets and Deepwater program staff we interviewed expressed continued concern that maintenance and logistics plans had not been finalized. Another official commented that there continues to be a lack of clarity defining roles and responsibilities between the Coast Guard and system integrator for maintenance and logistics. Coast Guard officials stated in fall 2006 that the system integrator was contractually responsible for developing key documents related to plans for the maintenance and logistics for the NSC and Maritime Patrol Aircraft. However, Deepwater program officials stated that because the Coast Guard was not satisfied with the level of detail provided in early drafts of these plans, it was simultaneously developing "interim" plans that it could rely on while the system integrator continued to develop its own versions. While the Coast Guard's more active role may help its ability to ensure adequate support for Deepwater assets that are coming on-line in the near term, our on- going work will continue to focus on this issue. Our 2004 review revealed that the Coast Guard had not developed quantifiable metrics to hold the system integrator accountable for its ongoing performance. For example, the process by which the Coast Guard assessed performance to make the award fee determination after the first year of the contract lacked rigor. At that time, we also found that the Coast Guard had not yet begun to measure contractor performance against Deepwater program goals--the information it would need by June 2006 to decide whether to extend the system integrator's contract award term by up to another 5 years. Additionally, we noted that the Coast Guard needed to establish a solid baseline against which to measure progress in lowering total ownership cost--one of the three overarching goals of the Deepwater program. Furthermore, the Coast Guard had not developed criteria for potential adjustments to the baseline. Preliminary observations from our ongoing work on the Coast Guard's efforts to improve system integrator accountability follow. In 2004 we found the first annual award fee determination was based largely on unsupported calculations. Despite documented problems in schedule, performance, cost control, and contract administration throughout the first year, the program executive officer awarded the contractor an overall rating of 87 percent, which fell in the "very good" range as reported by the Coast Guard award fee determining official. This rating resulted in an award fee of $4 million of the maximum $4.6 million. The Coast Guard continued to report design, cost, schedule, and delivery problems, and evaluation of the system integrator's performance continued to result in award fees that ranged from 87 percent to 92 percent of the total possible award fee (with 92 percent falling into the "excellent" range), or $3.5 to $4.8 million annually, for a total of over $16 million the first 4 years on the contract. The Coast Guard continues to revise the award fee criteria under which it assesses the system integrator's performance. The current award fee criteria demonstrate the Coast Guard's effort to use both objective and subjective measures and to move toward clarity and specificity with the criteria being used. For example, the criteria include 24 specific milestone activities and dates to which the system integrator will be held accountable for schedule management. However, we recently observed two changes to the criteria that could affect the Coast Guard's ability to hold the contractor accountable. First, the current award fee criteria no longer contain measures that specifically address IPTs, despite a recommendation we made in 2004 that the Coast Guard hold the system integrator accountable for IPT effectiveness. The Coast Guard had agreed with this recommendation and, as we reported in 2005, it had incorporated award fee metrics tied to the system integrator's management of Deepwater, including administration, management commitment, collaboration, training, and empowerment of the IPTs. Second, a new criterion to assess both schedule and cost management states that the Coast Guard will not take into account milestone or cost impacts determined by the government to be factors beyond the system integrator's control. However, a Coast Guard official stated that there are no formal written guidelines that define what factors are to be considered as being beyond the system integrator's control, what process the Coast Guard is going to use to make this determination, or who is ultimately responsible for making those determinations. The Deepwater program management plan included three overarching goals of the Deepwater program: increased operational effectiveness, lower total ownership cost, and customer satisfaction to be used for determining whether to extend the contract period of performance, known as the award term decision. We reported in 2004 that the Coast Guard had not begun to measure the system integrator's performance in these three areas, even though the information was essential to determining whether to extend the contract after the first 5 years. We also reported that the models the Coast Guard was using to measure operational performance lacked the fidelity to capture whether improvements may be due to Coast Guard or contractor actions, and program officials noted the difficulty of holding the contractor accountable for operational effectiveness before Deepwater assets are delivered. We made a recommendation to Coast Guard to address these issues. According to a Coast Guard official, the Coast Guard evaluated the contractor subjectively for the first award term period in May 2006, using operational effectiveness, total ownership costs, and customer satisfaction as the criteria. The result was a new award term period of 43 of a possible 60 months. To measure the system's operational effectiveness, the Coast Guard has developed models to simulate the effect of the Deepwater assets' capabilities on its ability to meet its missions and to measure the "presence" of those assets. However, in its assessment of the contractor, the Coast Guard assumed full operational capability of assets and communications and did not account for actual asset operating data. Furthermore, the models still lacked the fidelity to capture whether operational improvements are attributable to Coast Guard or contractor actions. As a result the contractor received credit for factors beyond its control--although no formal process existed for approving such factors. Total ownership cost was difficult to measure, thus the contractor was given a neutral score, according to Coast Guard officials. Finally, the contractor was rated "marginal" in customer satisfaction. The Coast Guard has modified the award term evaluation criteria to be used to determine whether to grant a further contract extension after the 43-month period ends in January 2011. The new criteria incorporate more objective measures. While the three overall Deepwater program objectives (operational effectiveness, total ownership costs, and customer satisfaction) carried a weight of 100 percent under the first award term decision, they will represent only about a third of the total weight for the second award term decision. The criteria include items such as new operational effectiveness measures that will include an evaluation of asset-level key performance parameters, such as endurance, operating range, and detection range. The new award term criteria have de-emphasized measurement of total ownership cost, concentrating instead on cost control. Program officials noted the difficulty of estimating ownership costs far into the future, while cost control can be measured objectively using actual costs and earned value data. In 2004, we recommended that the Coast Guard establish a total ownership cost baseline that could be used to periodically measure whether the Deepwater system-of-systems acquisition approach is providing the government with increased efficiencies compared to what it would have cost without this approach. Our recommendation was consistent with the cost baseline criteria set forth in the Deepwater program management plan. The Coast Guard agreed with the recommendation at the time, but subsequently told us it does not plan to implement it. In our current work, we will explore the implication of the revised award term evaluation criteria and the Coast Guard's ability to measure the overarching goals of the acquisition strategy. Establishing a solid baseline against which to measure progress in lowering total ownership cost is critical to holding the contractor accountable. The Coast Guard's original plan, set forth in the Deepwater program management plan, was to establish as its baseline the dollar value of replacing assets under a traditional, asset-by-asset approach as the "upper limit for total ownership cost." In practice, the Coast Guard decided to use the system integrator's estimated cost of $70.97 billion plus 10 percent (in fiscal year 2002 dollars) for the system-of-systems approach as the baseline. In 2004, we recommended that the Coast Guard establish criteria to determine when the total ownership cost baseline should be adjusted and ensure that the reasons for any changes are documented. Since then, the Coast Guard established a process that would require DHS approval for adjustments to the total ownership cost baseline. The Deepwater Program Executive Officer maintains authority to approve baseline revisions at the asset or domain level. However, depending on the severity of the change, these changes are also subject to review and approval by DHS. In November 2005, the Coast Guard increased the total ownership cost baseline against which the contractor will be evaluated to $304 billion. Deepwater officials stated that the adjustment was the result of incorporating the new homeland security mission requirements and revising dollar estimates to a current year basis. Although the Coast Guard is required to provide information to DHS on causal factors and propose corrective action for a baseline breach of 8 percent or more, the 8 percent threshold has not been breached because the threshold is measured against total program costs and not on an asset basis. For example, the decision to stop the conversion of the 49 110-foot patrol boats after 8 hulls did not exceed the threshold; nor did the damages and schedule delay to the NSC attributed to Hurricane Katrina. During our ongoing work, Coast Guard officials acknowledged that only a catastrophic event would ever trigger a threshold breach. According to a Coast Guard official, DHS approval is pending on shifting the baseline against which the system integrator is measured to an asset basis. Further, our 2004 report also had recommendations related to cost control through the use of competition. We reported that, although competition among subcontractors was a key mechanism for controlling costs, the Coast Guard had neither measured the extent of competition among the suppliers of Deepwater assets nor held the system integrator accountable for taking steps to achieve competition. As the two first-tier subcontractors to the system integrator, Lockheed Martin and Northrop Grumman have sole responsibility for determining whether to provide the Deepwater assets themselves or hold competitions--decisions commonly referred to as "make or buy." We noted that the Coast Guard's hands-off approach to make-or-buy decisions and its failure to assess the extent of competition raised questions about whether the government would be able to control Deepwater program costs. The Coast Guard has taken steps to establish a reporting requirement for the system integrator to provide information on competition on a semi- annual basis. The system integrator is to provide detailed plans, policies, and procedures necessary to ensure proper monitoring, reporting, and control of its subcontractors. Further, reports are to include total procurement activity, the value of competitive procurements, and the subcontractors' name and addresses. The system integrator provided the first competition report in October 2006. However, because the report did not include the level of detail required by Coast Guard guidelines, a Coast Guard official deemed that the extent of competition could not be validated by the information provided and a request was made to the system integrator for more information. We will continue to assess the Coast Guard's efforts to hold the system integrator accountable for ensuring an adequate degree of competition. - - - - - Mr. Chairman, this concludes my testimony. I would be happy to respond to any questions Members of the Committee may have. For further information about this testimony, please contact: John Hutton, Acting Director, Acquisition and Sourcing Management, (202) 512-4841, [email protected] Stephen L. Caldwell, Acting Director, Homeland Security & Justice, (202) 512-9610, [email protected] In addition to the contacts named above, Penny Berrier Augustine, Amy Bernstein, Christopher Conrad, Adam Couvillion, Kathryn Edelman, Melissa Jaynes, Crystal M. Jones, Michele Mackin, Jessica Nierenberg, Raffaele Roffo, Karen Sloan, and Jonathan R. Tumin made key contributions to this report. Coast Guard: Status of Deepwater Fast Response Cutter Design Efforts, GAO-06-764 (Washington, D.C.: June 23, 2006). Coast Guard: Changes to Deepwater Plan Appear Sound, and Program Management Has Improved, but Continued Monitoring is Warranted, GAO-06-546 (Washington, D.C.: Apr. 28, 2006). Coast Guard: Progress Being Made on Addressing Deepwater Legacy Asset Condition Issues and Program Management, but Acquisition Challenges Remain, GAO-05-757 (Washington, D.C.: Jul. 22, 2005). Coast Guard: Preliminary Observations on the Condition of Deepwater Legacy Assets and Acquisition Management Challenges, GAO-05-651T (Washington, D.C.: Jun. 21, 2005). Coast Guard: Preliminary Observations on the Condition of Deepwater Legacy Assets and Acquisition Management Challenges, GAO-05-307T (Washington, D.C.: Apr. 20, 2005). Coast Guard: Deepwater Program Acquisition Schedule Update Needed, GAO-04-695 (Washington, D.C.: Jun. 14, 2004). Contract Management: Coast Guard's Deepwater Program Needs Increased Attention to Management and Contractor Oversight, GAO-04- 380 (Washington, D.C.: Mar. 9, 2004). Coast Guard: Actions Needed to Mitigate Deepwater Project Risks, GAO- 01-659T (Washington, D.C.: May 3, 2001). Coast Guard: Progress Being Made on Deepwater Project, but Risks Remain, GAO-01-564 (Washington, D.C.: May, 2, 2001). 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 U.S. Coast Guard's Deepwater program was designed to upgrade or replace its aging legacy aircraft and vessels with assets focusing on the Coast Guard's traditional at-sea roles. After the September 11, 2001 terrorist attacks, the Coast Guard took on additional security missions, resulting in revisions to the Deepwater plan. GAO's prior work raised concerns about Coast Guard's efforts to upgrade or acquire assets on schedule, and manage and effectively monitor the system integrator. This testimony provides GAO's preliminary observations on (1) events and issues surrounding the Coast Guard's bridging strategy to convert the legacy 110-foot patrol boats to 123-foot patrol boats; (2) the status of the Coast Guard's efforts to acquire new or upgraded Deepwater assets; and (3) the Coast Guard's ability to effectively manage the Deepwater program, hold contractors accountable, and control costs through competition. GAO's preliminary observations are based on audit work performed from August 2006 to February 2007. Numerous events since January 2001 led up to the failure of the Coast Guard's bridging strategy to convert its legacy 110-foot patrol boats into 123-foot patrol boats. These converted boats were removed from service on November 30, 2006 because of operational and safety concerns. According to the Coast Guard Commandant, actions are being taken to mitigate the impact of the removal of these patrol boats on mission activities. For example, patrol hours of some 110-foot patrol boats have been increased through the addition of crews from the 123-foot patrol boats, and other Coast Guard vessels have been deployed to assist in carrying out missions. The delivery record for the 10 classes of upgraded or new Deepwater aircraft and vessels is mixed. Specifically, 7 of the 10 asset classes are on or ahead of schedule. Among these, 5 first-in-class assets have been delivered on or ahead of schedule; 2 others remain on time but their planned delivery dates are in 2009 or beyond; therefore, delays could still potentially occur. Three Deepwater asset classes are currently behind schedule due to various problems related to designs, technology, or funding. For example, the Fast Response Cutter (a new vessel), which had been scheduled for first-in-class delivery in 2007, has been delayed by at least 2 years in part because work on its design was suspended until technical problems can be addressed. From the program's outset, GAO has raised concerns about the risks involved with the Coast Guard's acquisition strategy. In 2004, GAO reported that program management, contractor accountability, and cost control were all challenges, and made recommendations in these areas. Insufficient staffing, ineffective performance measures, and the Coast Guard's lack of knowledge about the extent to which the contractor was using competition have contributed to program risk. The Coast Guard has taken some actions to address these issues. GAO plans to continue to assess the Coast Guard's Deepwater program, including its efforts to address GAO recommendations, and will report the findings later this year.

The Food Stamp Program helps low-income individuals and families obtain a more nutritious diet by supplementing their income with food stamp benefits. The average monthly food stamp benefit was about $70 per person during fiscal year 1997. The program is a federal-state partnership in which the federal government pays the cost of the food stamp benefits and 50 percent of the states' administrative costs. The U.S. Department of Agriculture's Food and Nutrition Service (FNS) administers the program at the federal level. The states' responsibilities include certifying eligible households and calculating and issuing benefits to those who qualify. The Food Stamp Employment and Training Program, which existed prior to the Welfare Reform Act, was established to ensure that all able-bodied recipients registered for employment services as a condition of food stamp eligibility. The program's role is to provide food stamp recipients with opportunities that will lead to paid employment and decrease dependency on assistance programs. In fiscal year 1997, the states were granted $79 million in federal employment and training funding and spent $73.9 million, or 94 percent of the grant. In the Balanced Budget Act of 1997, the Congress increased grant funding for the Food Stamp Employment and Training Program to a total of $212 million for fiscal year 1998 and specified that 80 percent of the total had to be spent to help able-bodied adults without dependents meet the work requirements. For fiscal year 1999, the Congress provided $115 million in employment and training funding. These funds remain available until expended. Employment programs that the states choose to offer may involve the public and private sectors. For example, Workfare, which qualifies as an employment program under the Welfare Reform Act, requires individuals to work in a public service capacity in exchange for public benefits such as food stamps. Some states also allow participants to meet the work requirements by volunteering at nonprofit organizations. However, under the Welfare Reform Act, job search and job readiness training are specifically excluded as qualifying activities for meeting the act's work requirements. During April, May, and June 1998, a monthly average of about 514,200 able-bodied adults without dependents received food stamp benefits, according to information from the 42 states providing sufficient data for analysis. These adults represented about 3 percent of the monthly average of 17.5 million food stamp participants in the 42 states during that period. Of the 514,200 individuals, about 58 percent, or 296,400 of the able-bodied adults without dependents were required to meet the work requirements; 40 percent, or 208,200, were exempted from these requirements because they lived in geographic areas that had received waivers; and 2 percent, or 9,600, had been exempted by the states from the work requirements. (See app. I for state-by-state information.) The number of able-bodied adults without dependents receiving food stamp benefits has apparently declined in recent years, as has their share of participation in the program. For example, in 1995, a monthly average of 1.2 million able-bodied adults without dependents in 42 states participated in the Food Stamp Program, compared with the 514,200 individuals who participated in the period we reviewed. In addition, in 1995, 5 percent of food stamp participants were estimated to be able-bodied adults without dependents, compared with the 3 percent we identified through our survey of the states. FNS and state officials accounted for these differences by pointing out that (1) food stamp participation has decreased overall--from about 27 million per month nationwide in 1995 to about 19.5 million in April, May, and June 1998; (2) some able-bodied adults without dependents may have obtained employment and no longer needed food stamps; and (3) others who were terminated from the program may not have realized that they could regain eligibility for food stamp benefits through participation in state-sponsored employment and training programs or Workfare. Also, the states vary in the criteria they use for identifying able-bodied adults subject to the work requirements. During April, May, and June 1998, a monthly average of 23,600 able-bodied adults without dependents filled employment and training and/or Workfare positions in the 24 states that provided sufficient data for analysis. Fifteen of these states offered Workfare positions, 20 offered employment and training positions, and 11 offered both Workfare and employment and training positions. The 23,600 individuals accounted for about half of the 47,000 able-bodied adults without dependents who were offered state-sponsored employment and training assistance and/or Workfare positions. More specifically: Able-bodied adults without dependents filled about 8,000 Workfare positions per month, or 34 percent of the 23,700 Workfare positions offered by the 15 states with Workfare positions; Able-bodied adults without dependents filled about 15,600 employment and training positions per month, or 67 percent of the 23,300 employment and training positions offered by the 20 states. (See app. I for state-by-state information.) These 23,600 individuals accounted for about 17 percent of the 137,200 able-bodied adults without dependents who were subject to the work requirements in those states. Of the remaining 113,600, some may have been within the 3-month time frame for receiving food stamp benefits while not working, others may have met these requirements by finding jobs or Workfare positions on their own, and some may not have met the work requirements, thereby forfeiting their food stamp benefits. FNS and state officials said they could not yet explain the limited participation in employment and training and Workfare programs, but FNS officials and some states are trying to develop information on the reasons for low participation. In addition, some suggested that able-bodied adults without dependents participated to a limited extent in employment and training programs and Workfare because they (1) participate sporadically in the Food Stamp Program, (2) prefer not to work, or (3) believe that the relatively low value of food stamp benefits is not enough of an incentive to meet the work requirements. With only 3 months remaining in fiscal year 1998, the states were spending at a rate that would result in the use of significantly less grant funds for food stamp employment and training recipients than authorized. For the first three quarters of the fiscal year, through June 30, 1998, the states spent only 28.4 percent, or $60.2 million, of the $212 million in grants, according to FNS data. The rate of spending varied widely by state, ranging from 75 percent, or about $230,000 of the $307,000 authorized for South Dakota, to less than 1 percent, or $109,000 of the $13.4 million authorized for Michigan. Twenty-five of the states spent less than 20 percent of their grant funds, 17 spent between 20 and 49 percent, and 9 spent 50 percent or more. Also, according to preliminary fourth-quarter financial data reported to FNS, 43 states spent about $72 million, or 41 percent of the grant funds available to them for fiscal year 1998. (See app. II.) To better understand why the states were spending less of their grant funds than authorized, we interviewed food stamp directors and employment and training officials in 10 geographically dispersed states.In general, according to these officials, grant spending has been significantly less than authorized because (1) some states had a limited number of able-bodied adults without dependents who were required to work, (2) some states needed time to refocus their programs on able-bodied adults without dependents, and (3) some states reported that it was difficult to serve clients in sparsely populated areas because of transportation problems or the lack of appropriate jobs. When asked whether spending would change in fiscal year 1999, state officials had differing expectations. Officials from 4 of the 10 states--Georgia, Iowa, Ohio, and West Virginia--said that they anticipate spending about the same or less, and Pennsylvania officials were unsure whether spending would change. In contrast, officials from five states--Illinois, Michigan, Rhode Island, Texas, and Washington--anticipate increases in spending, mostly because of the improvements they have made to their employment and training programs. In discussing the rate of grant spending, officials of five states--Georgia, Pennsylvania, Washington, Texas, and West Virginia--said that the requirement to spend 80 percent of funds on able-bodied adults without dependents had caused them to decrease employment and training services to other food stamp participants. For fiscal year 1998, a maximum of 20 percent of the available grant funds--$42 million--was available for employment and training activities for other food stamp recipients, while $79 million had been provided for employment and training activities for all food stamp recipients in fiscal year 1997. State officials explained that prior to fiscal year 1998, most employment and training funds had been spent for food stamp participants who were not able-bodied adults without dependents. With the shift in funds to able-bodied adults without dependents, less has remained for the other food stamp recipients, who typically had constituted the majority of the employment and training participants in the past. Nevertheless, some of those not served by Food Stamp Employment and Training Programs may be eligible to receive employment and training through other federal and state programs. We provided USDA's Food and Nutrition Service with a copy of a draft of this report for review and comment. We met with Food and Nutrition Service officials, who provided comments from the Food and Nutrition Service's Office of General Counsel and the Director, Program Analysis Division, Office of Food Stamp Programs. The Food and Nutrition Service generally agreed with the contents of the report and provided technical and clarifying comments that we incorporated into the report as appropriate. To obtain information on the numbers of able-bodied adults without dependents who are receiving food stamps benefits, are required to meet work requirements, are exempted from the work requirements, and are participating in qualifying employment and training and/or Workfare programs, we surveyed the states and the District of Columbia. The survey data covered the months of April, May, and June 1998. We used the participation data for these months to estimate average monthly participation in the program. All states and the District of Columbia responded to our faxed questionnaire, and we contacted state officials as needed to verify their responses. Eighty-eight percent of the responses provided by 41 states and the District of Columbia were based on estimates and the remaining on data in state records. According to the state officials who provided estimates, their information systems were in the process of being revised and they plan to have actual data for fiscal year 1999. To obtain information on state spending of federal grants for employment and training programs, we obtained FNS' grant funding data reported by the states and the District of Columbia for the first three quarters of fiscal 1998, the latest data that were available as of November 1998. We subsequently obtained preliminary financial data for the fourth quarter of fiscal year 1998, which are subject to change after financial reconciliation. To supplement these data, we interviewed state food stamp directors or employment and training officials in 10 geographically dispersed states, including Georgia, Illinois, Iowa, Michigan, Ohio, Pennsylvania, Rhode Island, Texas, Washington, and West Virginia. We performed our work in accordance with generally accepted government auditing standards from July through November 1998. As agreed with your office, unless you publicly announce its contents earlier, we plan no further distribution of this report until 30 days from the date of this letter. At that time, we will send copies of this report to the appropriate Senate and House Committees; interested Members of Congress; the Secretary of Agriculture; the Administrator of FNS; the Director, Office of Management and Budget; and other interested parties. We will also make copies available to others upon request. Please call me at (202) 512-5138 if you or your staff have any questions about this report. Major contributors to this report are listed in appendix III. (continued) Average number of food stamp participants (by individual) in April, May, and June 1998 per Food and Nutrition Service's (FNS) data. This option in the Food Stamp Program not exercised by the state. Data insufficient for analysis. Percent of fiscal year 1998 grant funds expended(continued) Numbers may not add due to rounding. Charles M. Adams, Assistant Director Patricia A. Yorkman, Project Leader Alice G. Feldesman Erin K. Barlow Nancy Bowser Carol Herrnstadt Shulman 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. 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Pursuant to a congressional request, GAO provided information on: (1) the number of able-bodied adults without dependents who are receiving food stamp benefits, the number who are required to meet the work requirements, and the number who are exempted from the requirements; (2) the number of able-bodied adults without dependents participating in qualifying employment and training or Workfare programs; and (3) the amounts of federal grant funds that states spent through the first three quarters of fiscal year 1998 for employment and training or workfare programs for food stamp recipients. GAO noted that: (1) in the 42 states providing sufficient data for analysis, a monthly average of about 514,200 able-bodied adults without dependents received food stamp benefits during April, May, and June 1998; (2) about 58 percent of these individuals were required to meet the work requirements, another 40 percent were not required to work because they lived in areas that were considered to have high unemployment or an insufficient number of jobs, and 2 percent had been exempted by the states from the work requirements; (3) in the 24 states providing sufficient data for analysis, a monthly average of 23,600 able-bodied adults without dependents filled state-sponsored employment and training or workfare positions; (4) these participants represented about 17 percent of the able-bodied adults without dependents who were required to work in those states to receive food stamp benefits; (5) these individuals also accounted for nearly half of the able-bodied adults without dependents who were offered employment and training assistance or workfare positions by these states; (6) as of June 30, 1998, all the states had spent only about 28 percent, or $60.2 million, of the $212 million available for state employment and training programs for food stamp recipients; (7) according to preliminary fourth-quarter financial data, 43 states had spent about $72 million, or 41 percent of the grant funds available to them for fiscal year 1998; and (8) according to federal and state officials, the low percentage of spending for food stamp employment and training programs occurred primarily because: (a) fewer able-bodied adults without dependents were required to work than anticipated and fewer than anticipated accepted this assistance; and (b) some states needed more time to refocus their food stamp employment and training programs to target these individuals.